Finance Minister Shunichi Suzuki has stepped up the government's verbal warnings over the weakening of the yen with remarks that briefly supported a gain in the currency.
Suzuki told reporters on Tuesday that the government will closely monitor developments in the foreign exchange market, including the recent depreciation of the yen. It has an impact on the Japanese economy. The yen was briefly strengthened to 125.11 against the dollar from 125.48 before the remarks, though the gains were short-lived. The currency traded below levels seen before Suzuki made a statement in less than an hour.
The remarks are the latest attempt by Japanese policymakers to slow down changes in a currency that has been weakened in the last month as the Bank of Japan s stimulus stance diverges from the Federal Reserve's trajectory of interest rate hikes.
The dollar could lead to a surge in yen-weakening moves, as investors and market watchers are keeping an eye on whether or not it will breach a 20 year high against the yen at 125.86.
The players tend to take profits or close positions when the dollar yen approaches 125.86, which is a very key level, said Takuya Kanda, general manager at the Gaitame.com Research Institute in Tokyo.
The market will test the pair's upside again because of the trend of the dollar yen based on fundamentals and divergence in monetary policy. The key question is whether Japan will change its tone in its verbal intervention. The next target for the currency pair is 130 once 125.86 is broken. In the first three months of the year the softer yen is expected to have contracted slightly as a result of the soaring commodity prices on a fragile economy that is expected to have contracted slightly in the first three months of the year.
The BOJ is sticking to its stimulus stance despite speculation that it will have to tweak policy for now, arguing that underlying inflation is still too weak to warrant change.
Prime Minister Fumio Kishida has ordered his government to come up with a series of measures to alleviate the pain of rising energy costs for consumers and businesses.
Suzuki said that exchange rates are important.