U.S. TREASURY WARNS BANKS IT MAY INTERVENE IN YEN / THE FINANCIAL TIMES

US Treasury warns banks it may intervene in yen

Move comes amid speculation Tokyo intervened to support the currency

David Keohane in Tokyo, Ian Smith in London and Claire Jones in Washington

Bank of Japan governor Kazuo Ueda told a press conference on Friday that ‘there is a greater need than before to pay attention to upside risks to inflation’ © Andrew Caballero-Reynolds/AFP/Getty Images

The US Treasury has warned banks that it may intervene in yen exchange rates on Friday, in what would be the latest stage of combined efforts between Tokyo and Washington to support the beleaguered currency.

“[The] Treasury has informed a number of banks through the Federal Reserve Bank of New York that it may intervene today in the yen and that banks should stand ready for future action,” said a person familiar with the matter.

The yen strengthened as much as 3 per cent on Thursday, with traders and analysts saying they believed the Japanese government had moved to support the currency amid a rise in trading volumes. 

Officials in Tokyo declined to comment on whether they had acted. 

The currency was firm on Friday, trading close to the previous day’s intraday highs.

Treasury secretary Scott Bessent posted on X that he looked forward to “seeing my longtime friend, Bank of Japan governor Kazuo Ueda” at the G20 finance ministers’ meeting in North Carolina in August. 

He added that the two countries “continue to enjoy a strong relationship and close co-ordination”.

The fresh moves came after the BoJ held interest rates at 1 per cent on Friday, as widely expected by market participants. 

Ueda said he would ensure the central bank did not “fall behind the curve” and could speed up rate rises, something being closely watched by FX traders.

“Given that underlying inflation is approaching our 2 per cent price stability target, we believe there is a greater need than before to pay attention to upside risks to inflation,” Ueda said. 

“With that assessment in mind, we intend to discuss these issues carefully at future monetary policy meetings.”

Traders are putting a roughly 40 per cent chance of a quarter-point rise in the BoJ’s policy rate in September, according to derivatives markets, up from 30 per cent earlier in the week.

Ueda has faced criticism from investors over his failure to raise rates more quickly, with some warning that the BoJ risks losing credibility in financial markets if it does not speed up.

Identifying AI-related demand and currency fluctuations as risk factors, Ueda said that “depending on how inflation develops, if the bank judges that monetary conditions are becoming too accommodative, it is entirely possible that it could accelerate the pace of interest rate increases”.

Masayuki Nakajima, strategist at Mizuho, said that this “was the headline quote that markets were waiting for”.

Overall, Nakajima said the press conference had been “clearly hawkish” and that Ueda “managed to meet market expectations”, despite them becoming heightened by the assumed FX intervention.

“Based on the price action . . . I think Japan must have intervened overnight,” said Yujiro Goto, chief foreign exchange strategist at Nomura.

A Mizuho analysis of official data and broker estimates put the suspected Thursday intervention by the Japanese authorities at roughly ¥8.45tn ($52.8bn).

The New York Federal Reserve conducted a so-called rate check on dollar-yen on behalf of the US Treasury on Thursday, according to people familiar with the matter. 

Asking currency-dealing banks for the current exchange rate is typically seen as a precursor to direct foreign exchange purchases. 

The New York Fed made a similar move in January.

Atsushi Mimura, Japan’s vice-minister of finance for international affairs, said: “We understand that we are receiving support from the US authorities that goes beyond mere moral support. 

We have been in constant contact with them.”

The assumed intervention came after the US Federal Reserve held rates steady on Thursday and before the BoJ’s decision, which analysts said opened a window for action by the government by easing the downward pressure on the yen.

The currency had fallen close to ¥164 to the dollar earlier in the week amid investor fears about rising oil prices and how Japan’s Prime Minister Sanae Takaichi can afford her fiscal stimulus plans. Following the end of Ueda’s press conference on Friday, the yen strengthened sharply to less than ¥159 against the US dollar, sparking speculation of further official intervention.

“It looks like [another intervention], but smaller in scale,” said one FX banker. 

“As we have seen in past episodes, they intervene more than once.”

Thursday’s apparent intervention would be the first since a series of moves by the government in April and May that involved ¥11.7tn ($73bn) being spent to prop up the currency.

This time, due in part to apparent co-ordination with the US, some analysts said the gains had a better chance of being maintained, at least in the short term.

Osamu Takashima, foreign exchange strategist at Citigroup in Tokyo, said it was unlikely that the yen would weaken once more to ¥164 to the dollar “in the very near term” because it seemed the US was willing to help Japan defend its currency.

He added that since the market would be wary of further intervention, “dollar-yen upside is probably limited for now”.

But others have said that any intervention by Japanese authorities will struggle to provide lasting support to the currency without assistance from higher interest rate expectations, especially at a time when the Fed is expected to raise rates in the coming months, lifting the dollar.

One banker in Asia said clients were already testing the government’s commitment, putting on yen short positions with targets around ¥162.