Bank of Japan under growing pressure. Currency intervention possible?

The Japanese yen has taken center stage in currency markets, hitting its weakest level in eight months against the US dollar.The currency lost 3.6% over the week, its biggest weekly decline in a year. In Friday trading Price USD / JPY It hovers around 152,76. In response to the currency's sharp weakening, Japanese Finance Minister Katsunobu Kato sharpened his tone, calling the recent market movements "unilateral and abrupt." He emphasized that the government was closely monitoring the situation, which was interpreted as a warning of possible currency intervention. Although intervention is not yet certain, Japan could only decide to do so at an exchange rate approaching 160 yen per dollar.

The situation is further complicated by the political context. The new leader of the ruling Liberal Democratic Party, Sanae Takaichi, tried to calm the markets by declaring no support for a too weak yen and distancing herself from the Bank of Japan's interest rate decisions.However, her earlier statements – including her opposition to interest rate hikes – reinforced expectations that the central bank would decide to halt monetary policy tightening, which contributed to further weakening of the yen.

The current weakening of the currency is putting pressure on Bank of Japan, which may be forced to act more quickly as a weaker yen increases import costs and intensifies inflationary pressures. Financial markets currently rate an interest rate hike at the October 30 meeting as a 21% probability. Political uncertainty is also deepening due to Takaichi's difficulties in maintaining his coalition with the Komeito party. A potential lack of agreement could further negatively impact investor sentiment and undermine confidence in Japan's political stability.

Source: Krzysztof Kamiński, OANDA TMS Brokers