Japanese Finance Minister Reiterates Concerns: Yen Undervaluation is a "Big Problem," Will Cooperate Closely with the US to Maintain Forex Market Stability

According to Zhihui Finance APP, Japanese Finance Minister Katayama Kazuki stated that the weakness of the yen remains an ongoing concern, and Japan and the United States will continue to maintain close contact to seek orderly operation of the foreign exchange market. Katayama said on Tuesday: “As Takao Takashi mentioned during the recent Japan-U.S. summit in New York, I believe that, overall, the undervaluation of the yen is an issue. We will continue to maintain close communication between Japanese and U.S. financial authorities and strive to maintain the orderly functioning of the foreign exchange market.”

Katayama Kazuki made these remarks after a phone call with U.S. Treasury Secretary Janet Yellen last Friday evening. During the call, the two officials reiterated their shared concerns over the undervalued yen and agreed to further strengthen cooperation. Katayama stated that she told Yellen during the conversation that Japanese Prime Minister Takao Takashi is not a reflationist. This statement was clearly intended to assure Yellen that the Japanese Prime Minister does not seek unconstrained expansionary policies.

Even though the Bank of Japan raised its policy rate earlier this month to the highest level in 31 years, the yen’s weakness persists. The policy signals released by the Bank of Japan, coupled with the market’s growing bets on further rate hikes by the Federal Reserve, have fueled speculation that the interest rate differential between Japan and the U.S. may widen, once again putting pressure on the yen.

Japanese authorities have intervened in the foreign exchange market multiple times this year to support the yen—intervening for the first time during the Golden Week holidays in spring, and again in the summer, which pushed this year’s forex market intervention spending to record highs. In July, Japan and the U.S. carried out their first joint yen-buying intervention in 28 years.

Katayama Kazuki’s latest remarks indicate that Japanese authorities remain vigilant about the risk of further yen depreciation. Japan’s top currency official Atsushi Mimura stated on Monday that the market should take the “very clear” message sent on the yen by Tokyo and Washington last week seriously. Addressing the recent yen decline in an interview, Mimura said: “The Japanese Prime Minister, Finance Minister, and U.S. officials have sent a very clear message. The market should recognize this message as it is.” He added: “I will closely monitor whether the market continues to take this message seriously.”

Strategists believe that given the continued depreciation of the yen after the BOJ’s September 18 policy meeting, 160 yen per U.S. dollar has once again become a level testing Japan’s tolerance for yen weakness. However, escalating threats of intervention may in themselves curb the yen’s decline. But whether intervention can bring about a lasting reversal may depend largely on U.S. participation, as historically, when monetary policy fundamentals remain unfavorable, Japan’s unilateral actions have often struggled to produce long-term effects.

In addition, regarding the issue of rising government bond yields, Katayama Kazuki said she would continue to monitor developments with a high sense of urgency while maintaining close communication with market participants. Japan’s benchmark 10-year government bond yield has hovered around 3%, while the global bond market is experiencing a sell-off.

Katayama Kazuki stated that, from a global perspective, the rise in Japanese government bond yields does not seem particularly significant. She referred to her discussions last week with billionaire investor Stanley Druckenmiller and JPMorgan CEO Jamie Dimon.

Katayama Kazuki noted that both men pointed out that global inflationary pressures are rising, including the impact of higher oil prices and other commodity prices, while government spending is on the rise as countries attempt to manage these pressures.

Katayama Kazuki also said that the two observed that hyperscalers—companies that operate computing services on an enormous scale—are raising massive amounts of capital in the corporate bond market. Katayama noted that it has traditionally been believed that government borrowing crowds out private sector financing, but that this trend may be reversing, with large-scale corporate bond issuance increasingly putting upward pressure on government bond yields.

Katayama Kazuki concluded: “They told me that, by comparison, the rise in Japanese yields is not particularly large. They are looking at the situation calmly and believe that ultimately yields in Japan, the U.S., and Europe are all rising, and I also hold this more cautious view.”