Japanese financial authorities have asserted their commitment to addressing excess volatility in the currency market.
"We're ready to take necessary action against excess volatility, without ruling out any options," said Japan Finance Minister Shinichi Suzuki.
Masato Kanda, Vice Minister of Finance for International Affairs, repeated the sentiment. Kanda also said he had met with Prime Minister Fumio Kishida to discuss the economic situation "in general."
However, the top officials have yet to confirm any market intervention to support the yen following a recent surge in the currency's value.
On Tuesday, the yen strengthened sharply against the U.S. dollar, hitting the 150 mark. However, not long after, the currency slumped again by nearly two percent, from a fresh one-year high of 150.16 to 147.312.
Kanda said any decision regarding intervention would depend on the level of volatility rather than specific yen levels.
Japan has been under pressure to combat the yen's depreciation amid anticipation that the U.S. Federal Reserve will keep its overnight benchmark rate higher for an extended period. Meanwhile, the Bank of Japan (BoJ) maintains its ultra-low rates. This year, the yen has experienced a roughly 12 percent depreciation against the dollar.
Keeping yen from declining
On Wednesday, the BOJ conducted emergency bond buying to keep long-term interest rates from rising and hurting the fragile economy. This comes after the BoJ's decision in July to allow long-term rates to rise more freely did little to reverse the yen's downtrend.
This situation raises questions among analysts about how long Tokyo can keep the yen bears at bay.
"It's uncertain whether Tuesday's volatility was due to intervention. But judging from the government's policy and from the tools left for Japan, the finance ministry is likely keen to step in," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
"When yen-selling pressure persists, the chance of intervention reversing the dollar/yen's trend isn't high."
The yen's weakness is concerning because Japanese companies have been forced to move production overseas. The economy relies heavily on imported goods, including fuel, raw materials and machinery parts.
A weaker yen boosts Japanese exports but hurts households by inflating the cost of imported raw materials. With inflation surpassing the BoJ's two percent target for over a year, the yen's recent decline adds pressure as the central bank conducts a rate review ending on October 31.
Japan's recent market intervention
Japan bought yens in September 2022, marking its first involvement in the forex market since 1998. This decision came in response to the BoJ's decision to retain its accommodative monetary policy, which drove the yen's value down to as low as 145 per dollar.
One month later, Japan intervened once more when the yen dropped to its weakest point in 32 years at 151.94.
When the Japanese government intervenes to stop the yen from rising in value, the Ministry of Finance issues short-term bills to raise the yen. Then, it sells yens to weaken the currency.
Meanwhile, authorities must use Japan's foreign reserves to buy dollars and sell them for yens to bolster the currency. The finance minister issues the order to intervene, and the BoJ executes the order.
Analysts point out that it is more difficult for Japan to intervene by buying yens than selling them. Although the country has nearly $1.3 trillion in foreign reserves, these could be eroded if Tokyo intervened too heavily.