Japan’s finance minister, Katsunobu Kato, spoke with Kyodo News about the trade agreement with the US. He confirmed it does not mention foreign exchange rates. Kato emphasized that there was a separate discussion about forex issues with Bessent during their talks in Tokyo. This statement addresses concerns about previous comments from Trump, who accused Japan of deliberately keeping the yen weak.

Focus On Forex Warnings

Mr. Kato’s clarification, which separates trade from currency discussions, suggests traders should pay more attention to the direct warnings about “excessive volatility” from Japanese officials. These warnings are now the main signal for intervention, moving beyond earlier conversations. The Ministry of Finance has supported its statements with significant spending. It spent approximately ¥9.8 trillion in April and May 2024 to stabilize the yen. This spending is comparable to the record interventions seen in late 2022, showing that officials are not willing to let the yen weaken beyond the 155-160 per dollar range. This sets a soft ceiling for the currency pair, posing a clear risk for those holding long dollar-yen positions. We expect implied volatility for dollar-yen options to stay high, particularly as the currency pair approaches levels that have previously prompted action. Derivative traders should consider strategies that benefit from sharp moves rather than slow trends, like buying puts to protect against a quick decline. Interventions often result in a fast 3-5 yen drop within hours, which can destroy unprepared positions.

Interest Rate Differential Impact

Despite the risk of intervention, the main factor remains the large interest rate difference between the Federal Reserve’s rate, currently over 5%, and the Bank of Japan’s rate, near zero. Historically, this wide gap creates a strong carry trade that puts ongoing pressure on the yen. Therefore, we see any yen strength from intervention as a temporary chance to reposition, not a long-term trend change. Create your live VT Markets account and start trading now.

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