The Bank of Japan directly intervened in global currency markets overnight Thursday as officials moved to support the yen amid its two-decade lows against the U.S. dollar in the first such move since 1998.
Masato Kanda, Japan's Vice Finance Minister For International Affairs, told reporters in Japan that the government took "decisive action" in the currency markets following a Bank of Japan policy decision that kept rates unchanged at their near-record lows.
The move triggered the biggest one-day decline for the dollar against the yen since March of 2020, to peg the pairing at 141.89.
"We think that FX market intervention only aims to smooth-out volatile currency movement, not to change the course of currency depreciation," said ING currency analyst Min Joo Kang.
"The next big event risk now may be the early October meeting of central bank governors and finance ministers in Washington," she added. "The Japanese will have to convince US authorities that the strong dollar is a problem, such that G20 FX language is altered. That is a tough task, with the Fed still seemingly welcoming dollar strength"
Japan's economy, while export-focused, is sensitive to currency weakness as it boosts the cost of imported energy, adding to the nation's inflation pressures and reducing the purchasing power of its aging population.
Core inflation, in fact, accelerated to an annual rate of 2.8% last month, official figures indicated earlier this week, the fastest in more than eight years.
That's created a political dilemma for Prime Minister Fumio Kishida, who is being pressured by his ruling coalition government partners to boost fiscal spending in order to cushion the impact of surging inflation.
Reports of new spending packages of between $100 billion and $200 billion from Kishida's government, just as major economies around the world are reducing post-pandemic stimulus, would only add further weakness to the yen.
Meanwhile, analysts are expecting little support from the Bank of a Japan in terms of monetary tightening, given that long-serving Governor Harukiko Kuroda is preparing for his retirement in April of next year.
"There are four policy meetings left until Governor Kuroda retires and there is little possibility of policy change at these four meetings," Kang said. "Also, it is still too early to tell but it appears that it will take some time for the BoJ to make any policy changes even after Governor Kuroda steps down."