HG MARKETS:

The Japanese yen hovered near a 10-month low on Friday, though it found brief support after government officials increased their verbal warnings against speculative currency movements. The currency momentarily strengthened in early Asian trading after Finance Minister Satsuki Katayama stated that currency intervention remained a possibility if yen moves became excessively volatile. Her comments alerted traders to the risk of direct yen-buying by Tokyo. Despite the temporary lift, the yen was still trading around 157.41 per dollar, not far from the previous day’s low of 157.90, and was set to finish the week down nearly 1.8%.

At the core of the yen’s weakness is the large interest-rate gap between the United States and Japan. The U.S. Federal Reserve holds rates in the 3.75%–4.00% range, while the Bank of Japan maintains near-zero rates at 0.5%. This wide differential encourages a popular strategy known as the carry trade, where investors borrow yen at extremely low cost, convert it into dollars, and invest in higher-yielding U.S. assets like Treasuries. The trade offers easy profit and has attracted huge capital flows. As investors sell yen and buy dollars, the yen continues to weaken.

Concerns over Japan’s fiscal outlook have added to the currency’s downward pressure. Prime Minister Sanae Takaichi’s administration recently approved a large 21.3 trillion yen ($135.4 billion) economic stimulus package—her first major policy project. Investors worry such aggressive spending will deepen fiscal strain and further weaken the currency. Japan has intervened before to halt excessive yen declines, most notably in July 2024, when Tokyo spent 5.53 trillion yen (about $37 billion) to pull the yen back from 38-year lows, when USD/JPY briefly spiked to 161.94.

Meanwhile, the U.S. dollar index continued its climb, touching a 5½-month high near 100.13 and heading for its best weekly performance in more than a month. The dollar’s strength, combined with rising U.S. yields, adds additional pressure on the Japanese currency.

Looking ahead, the Bank of Japan is preparing for critical policy discussions. Governor Kazuo Ueda signaled that the BOJ will examine the feasibility and timing of a potential rate hike, with particular attention to whether wage growth strengthens next year. Recent data showed that core inflation remained above the BOJ’s 2% target in October, keeping the door open for an interest rate increase as soon as the December 19 policy meeting. Ueda also cautioned that a persistently weak yen could push up import costs and raise overall price levels—factors that could influence how soon the BOJ decides to adjust rates.

Japan now faces a delicate balancing act: supporting economic growth, managing inflation, and stabilizing a currency under heavy global pressure. The coming months will be critical in determining whether policymakers can halt the yen’s decline without derailing the nation’s fragile economic recovery.