- The strengthening of the US dollar pushed the yen-dollar exchange rate to the critical level of 160 on Wednesday, completely erasing the effects of Japan's 11.7 trillion yen currency intervention last month.
- The Middle East situation has escalated due to US-Iran military conflicts, triggering market risk aversion. The US military's strike on Iran's Qeshm Island increased demand for the dollar, while Japan's economy, heavily reliant on energy imports, put further pressure on the yen's exchange rate.
- Japanese Prime Minister Sanae Takaichi made a rare verbal intervention to stabilize the exchange rate, followed by Bank of Japan Governor Kazuo Ueda, who sent hawkish signals, suggesting that if inflation risks exceed expectations, the central bank will actively discuss the necessity of raising interest rates.
Risk Aversion Drives Dollar Demand
Influenced by the escalation of geopolitical tensions, global financial markets have seen a significant rise in risk aversion. The US stated that Iran launched ballistic missiles at neighboring countries, which missed their targets, but in response, the US military conducted strikes on Iran's Qeshm Island. This conflict has stalled diplomatic negotiations between the US and Iran, leading to a substantial increase in demand for safe-haven assets like the dollar. Meanwhile, due to the US economy's relatively low sensitivity to energy price shocks and Japan's heavy reliance on energy imports, potential rises in crude oil prices often worsen Japan's trade balance, exerting continuous downward pressure on the yen's exchange rate.
Yen Hits Intervention Red Line Again
Driven by the overall strengthening of the dollar, the yen-dollar exchange rate fell to the critical level of 1 to 160 on Wednesday. This level is widely recognized as the foreign exchange intervention red line, where Japanese authorities conducted a record-scale market support action a month ago. This means that the 11.7 trillion yen (approximately 73 billion USD) intervention by the Japanese government to support the weak yen has been completely erased. Forex market strategy analysis indicates that although market participants are fully aware of the rapidly increasing risk of intervention by the Bank of Japan and the Ministry of Finance, this has not posed a substantial deterrent to short positions. The historic intervention, while temporarily lowering the exchange rate, failed to fundamentally reverse the trend, only buying policymakers relatively limited time.
Decision-Makers Intensify Verbal Intervention
Faced with the yen's return to historical lows, Japanese decision-makers quickly made intensive statements. Japanese Prime Minister Sanae Takaichi issued a statement indicating that the authorities are fully prepared to take appropriate measures against excessive fluctuations in the foreign exchange market when necessary. This rare verbal intervention provided some short-term support for the yen, causing it to briefly rebound during the trading session. However, as fundamental market pressures remained, the yen's exchange rate soon fell back to the 160 level. This reflects the gradually diminishing marginal impact of mere verbal warnings on market pricing under the dual influence of external interest rate differentials and geopolitical risks.
Bank of Japan Hints at Rate Hike Space
Subsequently, Bank of Japan Governor Kazuo Ueda delivered a speech with an overall hawkish policy stance. Ueda stated that if the risk of rising inflation exceeds the risk of economic downturn, the Bank of Japan must discuss the pros and cons of raising policy rates. Forex strategy analysts pointed out that Ueda's statement suggests that the current policy rate level is still significantly below the neutral rate, leaving room for future monetary policy normalization. If future core inflation data shows stronger resilience, the Bank of Japan may initiate a rate hike process earlier to alleviate the valuation adjustment pressure on the yen due to interest rate differentials.
