Japan’s Finance Minister, Katsunobu Kato, has issued a renewed warning over sharp movements in the yen after the currency slid to its weakest level in eight months against the dollar on Friday.
The yen briefly touched 153.27 before recovering slightly to trade around 152.94, as political uncertainty and monetary policy expectations fuelled volatility in Japan’s financial markets.
The decline comes amid the leadership transition within Japan’s ruling party, as investors react to newly elected LDP leader Sanae Takaichi’s pro-stimulus stance and its potential impact on the Bank of Japan’s tightening path, adding fresh pressure on policymakers to restore market confidence.
Markets react as political transition deepens yen losses
The yen’s latest slide follows the victory of Sanae Takaichi as leader of Japan’s ruling Liberal Democratic Party (LDP). Her win last weekend sparked renewed speculation that her pro-stimulus policies could delay further monetary tightening by the Bank of Japan (BOJ).
Markets interpreted her stance as a potential signal for continued low interest rates, pushing the yen lower despite the government’s ongoing efforts to stabilise the currency.
Takaichi, a long-time supporter of aggressive fiscal spending and monetary easing, has been trying to reassure investors that her administration will not encourage an excessively weak yen.
She stated on Thursday that she does not intend to interfere with BOJ policy or comment on rate decisions, attempting to dispel market fears that her agenda would conflict with central bank goals.
Her earlier comments from last year, where she described rate hikes as “stupid,” have resurfaced amid the yen’s decline, intensifying scrutiny over her economic approach.
Analysts say her leadership could influence expectations for BOJ’s next move as the central bank weighs inflation pressures against growth concerns.
Kato hints at closer monitoring, intervention fears grow
Finance Minister Kato said the government is watching markets closely for “one-sided and rapid” movements in the exchange rate and will assess any “excessive or disorderly” volatility.
His firmer tone has prompted speculation that Japan could step in to support the yen if depreciation accelerates further.
The Ministry of Finance has spent around ¥24.5 trillion ($160 billion) since 2022 to stabilise the currency, though many economists believe a fresh intervention is unlikely unless the yen approaches the 160 level.
Kato emphasised that exchange rates should reflect economic fundamentals and move in a stable manner, acknowledging that a weaker yen brings both benefits and challenges to Japan’s economy.
While a soft yen supports exporters by boosting overseas profits, it also increases import costs, putting pressure on households and small businesses as energy and raw material prices rise.
Japan’s policymakers now face the delicate task of preventing inflation from overheating while ensuring the recovery remains on track.
Coalition uncertainty and inflation risks cloud policy outlook
Adding to the pressure on the yen is uncertainty surrounding Japan’s political alliances. Takaichi faces early challenges in maintaining the ruling LDP’s coalition with the Komeito party.
The two sides are expected to meet later on Friday, but there is no confirmation yet on whether they will reach a deal to continue the partnership. Political instability could further weigh on investor sentiment and currency confidence.
At the same time, the yen’s weakness is fuelling inflationary risks. A depreciating currency increases the cost of imported goods, potentially complicating the BOJ’s path to normalising interest rates.
Financial markets currently price in a 22% chance of a rate hike when the central bank meets to announce its policy decision on 30 October.
The central bank remains cautious as it navigates between supporting economic growth and containing price pressures. Any premature rate hike could dampen consumption, while further yen depreciation might force policymakers to act sooner than expected.
Yen slide underscores Japan’s balancing act
Japan’s latest currency turbulence highlights the complex interplay between political shifts, market sentiment, and monetary policy.
While Takaichi’s government aims to sustain growth through fiscal measures, the BOJ’s tightening cycle remains uncertain, leaving the yen exposed to further weakness.
With global investors closely watching developments in Tokyo, Japan’s policymakers are under increasing pressure to restore confidence in the yen without derailing the fragile economic recovery.
The post Yen nears eight-month low as Japan faces fresh political, inflation pressures appeared first on Invezz