A man walks past a sign in Tokyo showing the price of the yen
The yen’s sharp fall overnight followed a US report that showed inflation increased unexpectedly in August © Richard A Brooks/AFP/Getty Images

A fresh collapse in the Japanese yen halted on Wednesday after authorities cranked up their warnings over a drop in the currency and called traders to quiz them on market conditions.

The yen has plunged through a series of multi-decade lows against the surging dollar in recent months, but a surprisingly strong set of US inflation data on Tuesday prompted a fresh 2 per cent drop in the Japanese currency overnight, pushing the exchange rate as high as ¥144.95.

In response, officials at the Bank of Japan phoned currency traders to inquire about market conditions — a so-called “rate check” that represents a high level of alarm, pulling the rate back down to ¥143. In the past, such checks have come ahead of instructions from the Ministry of Finance to intervene directly in the market to control the exchange rate.

Shunichi Suzuki, Japan’s top currency official and former finance minister, said he was “very concerned” at apparently speculative moves in the yen, Japanese media reported, adding that authorities would not rule out any options in their response, including direct intervention.

Traders still warned that without direct action from the finance ministry, a more aggressive test of the yen’s recent lows was still likely.

“The psychological warfare [between Japanese authorities and market participants] is expected to continue for a while,” said Masamichi Adachi, chief economist at UBS. “There is a view that Japan is buying time” until the US central bank backs away from its interest rate rises, he added.

The BoJ declined to comment, while the finance ministry did not immediately respond to a request for comment.

In contrast to the US, where the Federal Reserve has this year been raising interest rates aggressively in an effort to pull down inflation, the Bank of Japan is resolute in its ultra-loose monetary stance. That gap has crushed the yen against a range of other major currencies.

Some currency weakness is helpful to Japan, as it helps the country’s exporters. But it also bumps up the cost of commodity imports, and the speed of the decline is unsettling to businesses and investors. The yen has dropped by a fifth against the dollar this year.

The last time Japan intervened was in concert with other big economies in 2011, when the yen shot higher after the Tohoku earthquake and tsunami. But it has been more than two decades since authorities intervened to strengthen the currency following the Asian financial crisis and a collapse in Japan’s banking system.

Next week the Fed, the Bank of England and the Swiss National Bank are all expected to raise rates. Investors think the Fed’s rise could be as large as a full percentage point. This will keep up the pressure on the yen.

“The Ministry of Finance is very concerned about next week so that could be when the actual intervention occurs,” said one market participant. “For now, today’s rate check is a form of verbal intervention,” he added.

It is not certain that even an official round of dollar selling by the BoJ would force the yen to change course; interventions tend to be most successful when they are joint efforts from a range of heavy-hitting monetary authorities around the world rather than unilateral moves. For now, the Fed and ECB are highly unlikely to pull back on their interest rate rising plans while they tackle a historic surge in inflation.

Nicholas Smith, CLSA Japan strategist, was among several prominent analysts who believe direct, unilateral intervention will serve little purpose.

“I had assumed the Japanese authorities wouldn’t be stupid enough to let the world know its cannon’s loaded with cotton wool, but that’s politics,” Smith said.

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