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The Japanese yen fell to its weakest level against the US dollar since 1986, raising fears among traders that authorities may once again be forced to step in to prop up the ailing currency.
The yen fell 0.6 percent to 160.65 yen against the dollar on Wednesday, well below levels last reached in late April, before Japan's Finance Ministry spent a record 9.8 trillion yen ($62 billion) to boost the currency.
In response to the latest drop, Japan's top currency official Masato Kanda told reporters the government was “seriously concerned” about the yen's decline and would react to any “extreme” moves.
“If suddenly the price rises to 162 yen, they could use that as a reason to justify another intervention,” said Derek Halpenny, head of research at MUFG.
Halpenny said Japan's government would not want to let the currency fall further, as a weaker yen has pushed up the cost of living and Prime Minister Fumio Kishida would be eager to shore up support ahead of his Liberal Democratic Party's leadership election in September.
The yen has fallen 12 percent against the dollar this year as investors lowered their expectations for the Federal Reserve to cut interest rates, helping the U.S. currency rally. Although the Bank of Japan ended eight years of negative interest rates in March, it has remained cautious about the possibility of further rises in Japanese borrowing costs.
The yen surged in early May after Japan's last market intervention to as high as 151.85 yen per dollar, but soon weakened further as investors focused on the widening gap between U.S. and Japanese interest rates.
Analysts warn that authorities may be reluctant to intervene again given the fleeting impact of previous efforts.
“Given the amount of money that was spent before and the short-lived effect, it's not encouraging to see that happen again anytime soon,” said Themos Fiotakis, head of global FX at Barclays. “As long as the interest rate differential is wide, the yen will remain under pressure.”
Japanese officials have said they do not defend the currency at any particular level, and tend to intervene after a sharp drop rather than a gradual decline. Some analysts speculate they may wait to intervene until after upcoming elections in France and the release of U.S. data that could support the yen if there is further evidence that the world's largest economy is slowing.
“Japanese officials should choose their timing carefully,” Halpenny said. “If the euro falls sharply, the French election could trigger a surge in yen buying … and the US payrolls report next week could strengthen the yen.”