Japanese Yen edges higher from 160.00 after PM Takaichi’s intervention warning

• Above 159.80, USD/JPY holds steady despite retreating from two-week highs beyond the key 160.00 mark.
• Prime Minister Takaichi has issued an explicit warning of intervention in response to Japanese Yen weakness.
• A sharp rise in US yields, alongside dovish BoJ remarks, has put the Yen under heavy pressure this week.

A strong recovery in US Treasury yields is weighing on the Japanese Yen (JPY), which is hovering a few pips from the key 160.00 mark against the  US Dollar (USD) on Friday. The pressure on the currency prompted Japanese Prime Minister Sanae Takaichi to warn of intervention earlier in the day.

Tuesday’s US inflation release showed price pressures continuing to intensify well above the central bank’s 2% price stability target. With Federal Reserve (Fed) speakers signalling that a jumbo interest rate rise in December is possible, USD/JPY’s decline gathered pace this week.

Fed officials put a 50-basis-point rate rise in play

Earlier,  Fed Governor Christopher Waller argued that, given elevated inflation, “hiking only 25 basis points would put our credibility at risk”. Dallas Fed President Lorie Logan echoed that assessment a few days later, stating that “the FOMC needs to implement at least two more 25-basis-point rate increases.” 

Markets now assign a 13.3% probability to a half-point rate rise at the 9 December meeting, up from 0% last week, according to the CME’s FedWatch tool. As a result, the two-year government bond yield has climbed 35 basis points this week, while the benchmark 10-year yield has risen 25 basis points to move back above 5%. 

The US Dollar has strengthened across the board as US Treasury yields have surged, leaving the Japanese Yen under heavy pressure. Dovish remarks from Bank of Japan (BoJ) official Taichiro Asada have also weighed on the currency: on Thursday, he cautioned against the economic risks of increasing borrowing costs too quickly.

In this environment, Japanese Prime Minister Sanae Takaichi said earlier on Friday that authorities in Tokyo are “closely monitoring markets”  and that the government “will strive to preserve orderly forex markets,” signalling that the Ministry of Finance stands ready to intervene in support of the Yen. She also confirmed that she is in touch with US financial authorities, raising the prospect of coordinated action similar to that which lifted the JPY in late July.