Yen Faces Largest Weekly Drop in a Year, Raising Prospects of Government Intervention

TradingKey - On Friday, October 10th, the USD/JPY exchange rate hovered around 153, maintaining its highest level in eight months, with intraday peaks hitting 153.27. The yen has depreciated nearly 4% this week, likely marking the largest weekly drop since October last year.

The core reason behind the yen's steep decline is the unexpected election of Sanae Takaichi as the President of the Liberal Democratic Party, which has intensified market expectations that the Bank of Japan might not raise interest rates this year.

On Thursday, Takaichi stated that any decision by the Bank of Japan must align with government objectives, fueling concerns over the central bank's independence. Takaichi is known for her support of aggressive fiscal stimulus and monetary easing. A year ago, she even described rate hikes as a "foolish move."

Although she tried to clarify on Thursday that she does not favor a weak yen, stating she has no intention of encouraging excessive yen depreciation and refrained from commenting on the Bank of Japan's rate hikes, "the market still perceives that under Takaichi's leadership, it will be politically challenging for the Bank of Japan to raise rates," commented Carol Kong, a currency strategist at the Commonwealth Bank of Australia.

Traders currently estimate a roughly 45% chance of a Bank of Japan rate hike at the December meeting, with even lower odds for an October rate increase.

Regarding the recent volatility in the yen's exchange rate, Finance Minister Shunichi Kato increased his warnings, stating that the Japanese government will "carefully assess any excessive or disorderly market movements." Kato emphasized that the most important aspect is for the exchange rate to reflect fundamentals and remain stable.

Former Bank of Japan forex chief Atsushi Takeuchi suggested that Japanese authorities might tolerate moderate yen depreciation, but if it depreciates significantly to around 160 yen per dollar, intervention might occur.

Since 2022, Japan's Ministry of Finance has deployed approximately 24.5 trillion yen to support the weakening yen and prevent excessive depreciation, as such depreciation could exacerbate inflation and erode consumer purchasing power.

Additionally, recent reports indicate that Komeito Representative Tetsuo Saito announced his intention to withdraw from the coalition government during a meeting with Liberal Democratic Party President Sanae Takaichi this afternoon. Nomura Securities noted that political uncertainty has become a focal point for the market, with the possibility of the Liberal Democratic Party governing alone potentially triggering a reversal of the "Takaichi Trade" and further yen depreciation.