The Japanese yen pulled back from record lows and was trading at 161.2 levels on Friday, but Japan's Finance Minister Satsuki Katayama reiterated the government's readiness to intervene in the foreign exchange market at an appropriate moment to stabilize the currency, according to Reuters.
Yen Pullback and US Jobs Data
The yen had touched a record low of 162.8 on Tuesday as hopes of the US Federal Reserve raising rates gained steam due to high inflation. However, the pullback came after weaker-than-expected US jobs data. The US economy added just 57,000 jobs in June, data from the Bureau of Labor Statistics showed. The unemployment rate ticked lower to 4.2 percent, but that was due to a massive drop in labor participation numbers.
The weaker jobs report cooled fears of a rate hike, even as newly appointed Fed Chair Kevin Warsh reiterated that bringing down inflation remains a priority. High inflation in the US, which has stayed above the Fed's comfort level, and rising gasoline prices despite lower crude oil prices had earlier prompted expectations of a rate hike.
Japan's Intervention History
Japan spent more than USD 73 billion from April through May to stabilize the yen and arrest volatility. In Japan, the central bank intervenes in the forex market at the direction of the Ministry of Finance. Intervention involves buying and selling currencies using the Foreign Exchange Fund Special Account (FEFSA) to stabilize the currency during sharp fluctuations.
Yen Carry Trade Risks
The yen carry trade has seen investors borrow in yen at low rates and invest in higher-yielding assets abroad. In 2024, Japan's interest rate hike, after years of near-zero rates, disrupted the carry trade and led to its unwinding, causing a drop in US stocks. Investors fear that another intervention by the Ministry of Finance, combined with further rate hikes by the Bank of Japan, could unravel the carry trade and lead to significant losses.
Oil Prices and Geopolitical Factors
Oil prices fell after the US and Iran reached an interim peace agreement and began talks for a more durable peace deal. This development also contributed to easing inflationary pressures. However, the yen remains under pressure from global economic uncertainties and the interest rate differential between Japan and other major economies.
