Yen Approaches 160 as Finance Minister Warns of 'No Limit' Intervention

As the Japanese yen approaches the 160 mark against the US dollar once again, Japanese Finance Minister Katayama Satsuki issued the strongest signal of currency market intervention on Thursday. She stated that she has observed a large amount of speculative transactions and will take strong actions with "no restrictions." She emphasized that all previous interventions have achieved substantial effects and her stance this time is "very firm."

The market generally believes that the meeting between Katayama and US Treasury Secretary Beasant in Washington last week was a pivotal turning point, implying that Japan may have obtained tacit approval from the US side. Katayama also interpreted the rise in the stock market as the market's recognition of "Hinaomics" and stated that she will steadily advance fiscal policy.

However, the negative effects of the yen's depreciation are becoming apparent. The rise in energy and food import costs directly erodes household purchasing power, combined with the Middle East situation driving up oil futures speculation, the pressure of imported inflation continues to increase.

Japan's March CPI Rebound Exceeds Expectations, Middle East Conflicts Drive Up Inflation

In March, Japan's nationwide CPI rose by 1.5% year-on-year, higher than the previous value of 1.3%; the core CPI increased to 1.8%, exceeding expectations of 1.7%, marking the first acceleration in five months. However, the core CPI has been below the central bank's 2% target for two consecutive months.

The main reason for the rebound is the Middle East conflicts that have driven up energy costs. Credit Agricole warned that if oil prices remain high and subsidies are not expanded, core inflation could rise to 3.3% by the end of the year. The Japanese government has already canceled the temporary gasoline tax and released strategic crude oil reserves to cushion the impact.

Low Probability of Bank of Japan's Interest Rate Hike in April, Market Bets on June

The Bank of Japan will hold its interest rate meeting on April 27-28, and the market generally expects the interest rate to remain unchanged at 0.75%. Affected by the uncertainty in the Middle East, the swap market shows that the probability of an interest rate hike has plummeted from 73% in late March to about 5%.

However, inaction ≠ dovishness. Citigroup believes that this decision "may be hawkish" as the Bank of Japan is concerned about further yen depreciation and uncontrollable inflation. Reuters reported that the Bank of Japan plans to lower growth expectations and significantly raise inflation forecasts. Capital Economics believes that there is still a possibility of an interest rate hike in June.

The lesson from 2024 is that the Bank of Japan remained inactive that year, forcing the Ministry of Finance to spend about ten billion US dollars on currency intervention. A similar pattern is now being reenacted, with the Ministry of Finance once again at the forefront of the "currency defense war."