Yen Stages Recovery After Japanese Officials Issue Intervention Warning
The Japanese yen made a significant recovery on Friday, bouncing back from its nearly 10-month low recorded earlier in the week. This turnaround came after Japanese Finance Minister Satsuki Katayama explicitly warned about the possibility of government intervention to address what she called "excessively volatile and speculative moves" in the currency markets.
Despite this recovery, the yen remained on track for a weekly loss of approximately 1.2%, reflecting the ongoing pressure on Japan's currency. The currency had hit a worrying low of 157.90 per dollar on Thursday, marking its weakest position in almost ten months.
Government Stimulus and Market Intervention
In a major economic development, Prime Minister Sanae Takaichi's cabinet approved a massive 21.3 trillion yen ($135.4 billion) economic stimulus package on Friday. This substantial fiscal injection comes at a critical time for Japan's economy, which has been grappling with currency weakness and broader economic challenges.
The yen has faced considerable downward pressure since Takaichi's election as party leader on October 4, declining by approximately 6% since that date. Market analysts attribute this decline to growing concerns about Japan's worsening fiscal position despite the government's efforts to stabilize the economy.
Tokyo has demonstrated its willingness to intervene in currency markets previously, having spent 5.53 trillion yen (nearly $37 billion) in July 2024 to support the yen when it approached 38-year lows. This historical context made Friday's intervention threats particularly credible to market participants.
Federal Reserve Policy Shifts Impact Global Currencies
The dollar's trajectory saw significant influence from comments by New York Federal Reserve President John Williams, who indicated that the U.S. central bank could potentially cut interest rates "in the near term" without jeopardizing its inflation targets. This dovish stance helped cap the dollar's strength and provided additional support for the yen's recovery.
Michael Boutros, senior technical strategist at StoneX, emphasized the importance of Williams' remarks, stating "He carries a lot of weight, obviously" in reference to their market impact.
Market expectations for a Fed rate cut saw a dramatic shift, with fed funds futures traders now pricing in a 71% probability of a December cut, up significantly from just 39% on Thursday, according to the CME Group's FedWatch Tool.
However, not all Fed officials shared Williams' perspective. Boston Fed President Susan Collins argued that monetary policy is currently "in the right place" given the resilient economy, while Dallas Fed's Lorie Logan advocated for maintaining current rates "for a time" to better assess their economic impact.
Broader Currency Market Movements
In afternoon trading, the Japanese currency strengthened by 0.63% to 156.549 per dollar. Meanwhile, the dollar index, which measures the greenback against a basket of major currencies, flirted with a 5-1/2-month peak and settled at 100.19.
The euro declined by 0.16% to $1.1511, heading for a 1% weekly decline. Against the yen, the euro was down 0.83% at 180.01 yen, keeping the Japanese currency pinned near its lowest level since the introduction of the single European currency.
Sterling also faced downward pressure, falling 0.27% to $1.3105 as investors awaited Britain's budget announcement. The pound was set to lose 0.5% for the week amid concerns about the country's economic performance ahead of crucial tests for both the currency and bond markets.
In cryptocurrency markets, bitcoin fell to a seven-month low, declining 3.52% to $84,146.2, reflecting the broader risk-off sentiment affecting digital assets.
John Velis, head of Americas macro strategy at BNY Markets, noted that intervention threats have been losing some credibility in restraining the yen's movement. However, he added that "there is still this expectation of a decent shot of the Bank of Japan raising rates this year, if not early next year", which has helped mitigate more extreme currency movements.
