Words of warning by Japan finance minister fail to shake off yen’s weakening trend

Finance Minister Shunichi Suzuki has ramped up the government’s verbal warnings over the weakening of the yen with remarks that briefly supported a gain in the currency.

“The government will closely monitor developments in the foreign exchange market, including the recent depreciation of the yen, with a sense of vigilance,” Suzuki told reporters Tuesday. “That includes the impact on the Japanese economy.”

The yen briefly strengthened to ¥125.11 against the dollar from ¥125.48 before the remarks, though the gains were short-lived. The currency traded below levels seen before Suzuki’s comments within less than an hour.

The remarks are the latest attempt by Japanese policymakers to slow down moves in a currency that has sharply weakened in the last month as the Bank of Japan’s stimulus stance increasingly diverges from the Federal Reserve’s trajectory of interest rate hikes.

Investors and market watchers are keeping a close eye on whether the dollar will breach a 20-year high against the yen at ¥125.86, a development that could prompt another surge of yen-weakening moves.

“Players tend to take profits or close positions when the dollar/yen approaches ¥125.86, which is a very key level,” said Takuya Kanda, general manager at Gaitame.com Research Institute in Tokyo, commenting on the reaction to Suzuki’s remarks.

“But given the dollar/yen’s trend is based on fundamentals and divergence in monetary policy, the market will again test the pair’s upside. Key near-term is whether Japan will change the tone in its verbal intervention. Once ¥125.86 is broken, the next target for the currency pair is ¥130.”

The softer yen is amplifying the pain of soaring commodity prices on a fragile economy that is expected to have contracted slightly in the first three months of the year.

For now, the BOJ is sticking to its stimulus stance — arguing that underlying inflation is still too weak to warrant change, despite continued speculation it will have to tweak policy.

Prime Minister Fumio Kishida has ordered his government to come up with a series of measures to alleviate the pain of rising energy costs on consumers and businesses.

“Stable exchange rates are important,” said Suzuki. “Sharp fluctuations are undesirable.”