Japan’s Finance Minister Kato is worried about recent changes in foreign exchange rates, especially those caused by speculators. He stressed that currencies, especially the yen, should move steadily and reflect the country’s economic situation.

Currency Stability and New Tax Plans

Kato did not comment on current exchange rates but expressed a desire for more stable yen trading. He noted awareness of discussions regarding a new tax plan but did not explain how it will be funded. Kato expects both ruling and opposition parties to discuss funding options as they plan to eliminate the gasoline surcharge tax. Interest rates can be affected by various factors, and he will closely watch the Japanese Government Bond (JGB) market for any changes. Regarding fiscal management, Kato aims to adopt sound debt strategies and is involved in talks about how to handle debt servicing costs for the next fiscal year’s budget.

Yen’s Recent Decline and Intervention Risks

Kato’s concerns are a direct reaction to the yen’s recent decline, which saw the USD/JPY exchange rate exceed 165 earlier this week. Such warnings often precede direct actions from the Ministry of Finance in the currency markets, indicating that the risk of intervention has significantly increased. The main reason for the yen’s weakness is the ongoing interest rate disparity between Japan’s near-zero rates and the Federal Reserve’s rates above 5%. Despite Japan’s core inflation rising by 2.8% in July, the Bank of Japan has shown no signs of changing its loose monetary policy. This situation makes it very profitable for speculators to hold short positions on the yen, which Kato is clearly addressing. Looking back to the fall of 2022, we see a pattern: similar warnings led to substantial yen-buying interventions when the dollar-yen rate hit 150. Currently, speculative net short positions on the yen are reportedly at their highest since then, creating a crowded trade that could lead to a sharp market shift. For those trading derivatives, this situation suggests that implied volatility in yen pairs is likely to rise. It could be worth considering short-dated, out-of-the-money USD/JPY put options as an effective way to bet on a sudden drop due to intervention. Staying on the upward trend has become riskier, as the chances of a swift and significant reversal have increased. Create your live VT Markets account and start trading now.

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