Yen Continues to Weaken Despite Warnings from Katayama and Bessent

Yen Hits Lowest Point in 18 Months Despite Joint Concerns from Japan and US Officials

The Japanese yen has dropped to its weakest value in a year and a half, even as Japan's finance minister and the US Treasury Secretary voiced shared worries about the currency's ongoing decline.

On Tuesday, the yen slipped as much as 0.5% to 158.91 per US dollar. The downward trend intensified following reports from Kyodo News that Prime Minister Sanae Takaichi informed a senior Liberal Democratic Party member of her intention to call an early election. This move has reignited the so-called “Takaichi trade,” which has put pressure on government bonds and contributed to the yen’s weakness.

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Despite these developments, Finance Minister Satsuki Katayama stated she had raised the issue of the yen’s persistent decline during discussions with US Treasury Secretary Scott Bessent. Katayama told reporters that Bessent echoed her concerns about the currency’s one-sided movement.

A representative from the Finance Ministry who attended the meeting mentioned that both countries plan to maintain close communication about currency trends at the deputy ministerial level.

Bessent has previously advocated for the Bank of Japan to increase interest rates to help strengthen the yen. The recent meeting in Washington has fueled speculation that Katayama may be seeking approval for possible market intervention.

“The possibility of currency intervention is likely to become a focal point again,” said Rinto Maruyama, a strategist at SMBC Nikko Securities. He noted that the 160 yen per dollar level will be a critical threshold to monitor for potential intervention.

Market Intervention and Policy Responses

In 2024, Japanese authorities stepped into the currency market four times when the yen hovered near 160 to the dollar, establishing this level as a likely trigger for future action. Katayama’s emphasis on sharp, one-way moves highlights the kind of market volatility that could prompt further intervention.

Back in December, as the yen slipped past 157, Katayama warned that Japan retained the freedom to act in the market if necessary.

“Now that the yen has breached the 158 mark, I expect Japanese officials to start making statements as the dollar approaches 160,” said Bart Wakabayashi, head of State Street Bank & Trust’s Tokyo branch. “Authorities will likely try to calm volatility and signal that the market shouldn’t expect a one-way trend.”

Economic Impact and Future Outlook

The yen’s weakness is raising the cost of imports, which could further drive up prices in Japan. To cushion households from rising living expenses, Prime Minister Takaichi has introduced a large stimulus package, including subsidies to lower utility bills.

Most analysts anticipate that the Bank of Japan will hold off on further rate hikes until June, after raising rates in December to a three-decade high. However, the continued depreciation of the yen may force the central bank to act sooner.

Former BOJ board member Makoto Sakurai suggested that the central bank could raise rates as early as April, citing market unease over Takaichi’s fiscal policies.

“I believe the Takaichi administration will also want to curb the yen’s decline,” said Atsushi Takeda, chief economist at Itochu Research Institute.

US-Japan Talks and Broader Context

The meeting between Katayama and Bessent took place amid renewed concerns about possible political interference in US monetary policy, following legal action against the Federal Reserve by the Justice Department. Fed Chair Jerome Powell revealed that the central bank had received grand jury subpoenas, potentially leading to criminal charges related to his testimony on headquarters renovations.

Despite these pressures on the dollar, the yen continued to weaken on Tuesday.

Katayama and Bessent also met on the sidelines of a global summit on rare earths, where they discussed the importance of strengthening supply chains. Bessent outlined US initiatives to build more resilient and diversified supply networks, according to a Treasury statement.

Reporting assistance by Takahiko Hyuga and Keiko Ujikane.

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