On April 10th, in the U.S. financial markets, the dollar-yen rate temporarily declined to the 153 yen level, marking the lowest yen level in about 34 years.

It is presumed that the Japanese government considers around 152 yen to be a defense line, and the exchange rate of the dollar against the yen had been stagnant at levels just before reaching 152 yen since late March, possibly due to the strong awareness of the possibility of exchange intervention in the forex market at the same level, where yen buying and dollar selling would occur.

The breaking of this stagnation was due to the U.S. March CPI, released on the 10th, exceeding expectations, leading to a further retreat in expectations of an interest rate cut by the Federal Reserve (FRB).

In the U.S. financial markets on the 10th, where the yen depreciated beyond the defense line, it would not have been surprising if the Japanese government had moved to intervene in the forex market by buying yen and selling dollars. However, one reason why they did not actually intervene may have been that Prime Minister Kishida, who was visiting the U.S. as a state guest, held a summit meeting with President Biden on the same day, followed by a scheduled press conference.

The U.S. government is generally critical of intervention in the forex market by advanced countries, as it can lead to currency manipulation. If the Japanese government had intervened in the forex market during Prime Minister Kishida's visit to the U.S., it could have dampened the mood of the visit. Furthermore, there was a possibility that Prime Minister Kishida would be asked for an explanation at the press conference after the summit meeting.

The official stance of the Japanese government is that it does not set specific target levels for the exchange rate. However, this is in consideration of the U.S. government's view that intervention in the exchange rate, with awareness of the level or direction of the exchange rate, constitutes currency manipulation. The U.S. government allows exchange intervention only when there is excessive volatility due to speculative movements.

In reality, if the yen were to depreciate beyond the level of around 152 yen per dollar, which was the peak of yen depreciation in 2022 and 2023, it would gain momentum, potentially leading to further domestic price increases. Therefore, the level of around 152 yen per dollar can be considered the defense line for the Japanese government.

After the dollar-yen rate depreciated to the 153 yen level on the 10th, it was pushed back to the 152 yen level, preventing a rapid depreciation of the yen. This could be attributed in part to the retreat of expectations for Federal Reserve rate hikes, which led to an increase in U.S. long-term interest rates and a decline in U.S. stocks, causing instability in financial markets and prompting risk aversion with yen buying.

Furthermore, there are expectations that further yen depreciation could lead to upward pressure on domestic prices, which in turn could prompt the Bank of Japan to hike interest rates sooner, serving as a factor to halt further yen depreciation.

However, in the current situation where the yen has surpassed the defense line of 152 yen per dollar, it would not be surprising for the Japanese government to intervene in the foreign exchange market. While the Japanese government may consider around 155 yen per dollar as the second defense line, they are likely to intervene before the yen approaches that level.

One trigger for intervention could be the increased volatility in response to a yen depreciation of more than one yen in a day, prompting the government to intervene in the foreign exchange market. Another possibility is that they may aim to intervene when the yen has slightly shifted towards appreciation, in an attempt to push the yen higher. During periods of strong downward pressure on the yen, the effectiveness of foreign exchange intervention may be limited, and in a worst-case scenario, intervention could provide an opportunity for the market to buy dollars and sell yen. On the other hand, intervening during a period of yen appreciation for some reason can relatively easily lead to yen appreciation.

The delay in the timing of the FRB rate cut and the yen's depreciation are factors that increase the likelihood of the Bank of Japan implementing an additional rate hike relatively early. If this trend continues, the Bank of Japan is expected to proceed with an additional rate hike as early as September this year.

During a period of yen depreciation, the Bank of Japan may make remarks hinting at the possibility of an additional rate hike in an attempt to curb the depreciation of the yen. This can be seen as a form of verbal intervention. As a result, the more the yen depreciates, the stronger the speculation in the financial markets about the Bank of Japan's additional rate hike.

The Bank of Japan gained a powerful weapon against yen depreciation by abolishing its negative interest rate policy in March. By coordinating with the government and combining foreign exchange intervention with rate hikes, it may ultimately be possible to contain yen depreciation. From this perspective, it may be prudent to keep an eye on whether there will be a halt to yen depreciation in the early 150 yen range against the dollar.

However, there is a significant risk on the U.S. side. Going forward, if economic and price indicators show upside surprises and expectations for an FRB rate cut disappear within the year, or if expectations for rate hikes start to emerge, the uncertainty about the future direction of the dollar-yen rate is likely to increase significantly.

In such a scenario, there is a possibility that the dollar could strengthen sharply against the yen. On the other hand, if this triggers confusion in the U.S. financial markets, there may be renewed expectations for rate cuts or a move towards risk aversion leading to yen buying. The convergence of these factors in both directions could significantly increase volatility in the foreign exchange market.

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  Takahide Kiuchi

  Executive Economist