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Japan is warning about the yen as the currency weakens to a new 10-month low

(Bloomberg) — The yen weakened to a 10-month low against the dollar even after Japan issued its strongest warning of sharp currency movements in weeks, raising the likelihood of government intervention if the slump continues.

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The country’s top currency official said speculative moves could be seen in the currency market and warned that Tokyo was ready to take action if necessary.

“If these steps go through, the government will deal with them appropriately, without ruling out options,” said Masato Kanda, deputy finance minister for international affairs.

While the comment briefly pushed the yen to 147.37 against the dollar, as traders weighed the risk of Tokyo intervening in the market for the first time since last October, the dollar regained ground, reaching 147.82.

The US currency strengthened overnight against its main industry peers amid a sell-off in government bonds.

Kanda said currencies should move steadily in the market as a reflection of economic fundamentals, noting that there have been rapid movements this year as they did last year. Officials are watching the market with a great sense of urgency, he added.

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“These developments create uncertainty for businesses and households, which will have a negative impact on the economy,” he said.

Japan’s policy stance is contributing to the weakness of the country’s currency. As the Federal Reserve nears the end of its aggressive rate hikes to combat the strongest inflation in decades, the Bank of Japan has resolutely held on to the last remaining negative interest rates from major central banks.

Stimulus outlook

Although the BOJ loosened its grip on ten-year government bond yields in July, the upward movement is still contained. Until the central bank takes a clearer step towards tapering its stimulus measures, weakening pressures on the yen are likely to remain.

The Japanese government will be reluctant to re-enter markets unless absolutely necessary. Currency officials have remained largely silent in recent days as the yen slowly fell. They have said repeatedly in the past that they are concerned about sharp moves in the yen and not specific levels against other currencies.

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Last year’s interventions worth about $62 billion came after the yen appreciated more than 2 yen against the dollar in the past 24 hours. By taking action after sharp moves, Tokyo can justify intervention against its international allies, such as the US.

“The yen fell more than 1 yen overnight, which had already heightened concerns about verbal intervention,” said Tsutomu Soma, a bond and currency trader at Monex Inc. “However, there is still a long way to go before an actual intervention. Market parties themselves see the limit of 150 as a major obstacle.”

(Adds background on policy moves for Japan.)

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