Yen’s ‘One Sided’ Tumble to 1986 Low Boosts Intervention Risk

(Bloomberg) — The yen fell to the weakest level since 1986, fanning speculation authorities may be soon be forced to support the currency again in a bid to stem the worst selloff in the developed world.

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The Japanese currency slumped as much as 0.6% to 160.62 per dollar, blowing past where officials intervened in the market in April, and taking losses this year to more than 12%. Against the euro, it dropped to the weakest on record. The depreciation is raising the price of imports, hurting Japanese consumers and causing growing unease among businesses.

Masato Kanda, Japan’s vice minister of finance and currency chief, said Wednesday that officials are watching the foreign-exchange markets with a high degree of urgency and would take appropriate steps as needed. He described the currency’s latest move as “rapid” and “one sided,” but refrained from commenting if it’s excessive. The yen extended losses after his remarks.

The vast gap between interest rates in Japan — where borrowing costs remain near zero — and the US has kept pressure on the yen despite attempts to contain the slide. The next big pain point may emerge from a readout on the Federal Reserve’s favored US inflation gauge on Friday, which is key to the outlook for monetary policy.

“Rhetoric from the Ministry of Finance in recent days has signaled increased concern,” said Erik Nelson, macro strategist at Wells Fargo in London. He expects officials will hold out for the currency to slide to 165 per dollar before entering the market, a level that banks including Bank of America say is the new “line in the sand” for authorities.

A lot is at stake for Japan, which spent a record ¥9.8 trillion ($61.1 billion) in its most recent bouts of intervention. Citigroup estimates the country has $200 billion to $300 billion of ammunition to fund any campaign, which would entail selling US dollars and other currencies it holds in cash reserves or even government bonds around the world to buy yen.

For Dominic Konstam, any intervention is more about “slowing the process of the yen finding its ultimate bottom” as the Bank of Japan normalizes monetary policy.

“The problem that they’ve got are that they’re intervening on the wrong side,” the head of macro strategy at Mizuho Securities USA told Bloomberg Radio on Wednesday. “They’ve got limited reserves, they can’t spend hundreds of billions in terms of defending the currency.”

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So far this week, officials in Tokyo have limited their response to verbal warnings.

Finance Minister Shunichi Suzuki said they are closely monitoring developments in the market and will take all possible measures as needed. Currency chief Kanda had warned on Monday that authorities stand ready to intervene, 24 hours a day, if necessary, while reiterating they were not targeting a specific level.

“If the moves start to get disorderly north of 160, they may come in to smooth the move,” said Win Thin, global head of markets strategy at Brown Brothers Harriman & Co. in New York. “Buy until the BOJ tilts more hawkish, upside for USD/JPY is the path of least resistance.”

What Bloomberg Strategists Say…

“Somewhere around or just north of 161 remains the most likely threshold for intervention based on the trigger levels of my scorecard model.”

— Cameron Crise, macro strategist

Previous action by Japan to support its currency market has raised eyebrows overseas, with the US Treasury Department last week adding the nation to its “monitoring list” for foreign-exchange practices.

While the US stopped short of labeling Japan — or any other trade partner — as a currency manipulator, officials in Washington wrote that “in large, freely traded exchange markets, intervention should be reserved only for very exceptional circumstances with appropriate prior consultations.”

US Adds Japan to FX Watchlist Amid Global Strain of Firm Dollar

Contained Volatility

Still, US data Friday may ease some of the pressure on the yen. Economists forecast core PCE inflation — a measure that excludes the volatile food and energy categories — will decelerate, which could bolster the case for the Fed to lower borrowing costs this year.

Volatility also remains relatively low market, making it difficult for authorities to enter the market just yet, many strategists say. One-month implied volatility in dollar-yen has hovered below 9% for much of this month, down sharply from 12.4% in late April.

“Given quarter-end dollar demand and the fact that the volatility environment remains contained, Japanese authorities might wait a bit more before intervening once again,” said Roberto Cobo Garcia, head of G-10 FX strategy at Banco Bilbao Vizcaya Argentaria SA in Madrid. “Volatility needs to rise more if they are to step in again.”

Read: How to Tell If Japan Intervened to Prop Up the Yen: QuickTake

–With assistance from Yumi Teso, Brian Fowler, Vassilis Karamanis, Greg Ritchie and Carter Johnson.

(Updates pricing throughout; adds Mizuho strategist comment and details on intervention process.)

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