Japan is leveraging the Bank of Japan's hawkish policy shift, coupled with the diplomatic stance of US Treasury Secretary Scott Bessent, to attempt to strengthen the effectiveness of its intervention and stem the yen's continued depreciation. The USD/JPY pair rose to 160.47 on April 29th, but following interventions from the Bank of Japan and other parties, it plummeted on April 30th, falling to around 155.55, before fluctuating widely between 155 and 158 in the following trading days.

This exchange rate stabilization strategy is a collaborative effort between the Bank of Japan, the Ministry of Finance, and the United States. It's not aimed at a sudden reversal of the market trend, but rather at raising the market cost of shorting the yen. Meanwhile, domestic political divisions and energy import pressures continue to weigh on the yen's performance. Policy intervention can only temporarily slow the decline and cannot fundamentally change the long-term trend.

The Bank of Japan has shifted its stance and is now working with the Ministry of Finance to intervene in the exchange rate.

Bank of Japan Governor Kazuo Ueda signaled a hawkish stance last month, marking a significant turning point in monetary policy. He reached a rare policy consensus with the Ministry of Finance to jointly stabilize the yen's exchange rate. Two days after Ueda's statement on April 28, the Ministry of Finance initiated its first intervention in nearly two years, followed by multiple rounds of currency stabilization operations in May, with a total intervention of nearly 10 trillion yen.

The market widely anticipates that Bessenter's visit to Japan next week will provide policy support. Whether the US publicly approves or implicitly condones intervention, it will provide strong support for the yen. Bart Wakabayashi, manager of State Street Bank's Tokyo branch, said that current Japan-US policies are highly aligned, and Japan is not stabilizing the exchange rate alone. Both sides are working together to suppress short-selling forces, and Bessenter's visit and meeting itself have important market guiding significance.

In January, Bessant strongly supported the yen, urging the Bank of Japan to accelerate interest rate hikes and leading the US in conducting a currency assessment, which was seen as a precursor to coordinated intervention. He will now embark on a three-day visit to Japan, planning to meet with Finance Minister Satsuki Katayama and Prime Minister Sanae Takaichi. The Bank of Japan officially announced last Friday that Kazuo Ueda will be attending a meeting in Switzerland from Saturday to May 13, thus missing the opportunity to meet with Bessant in Tokyo.

Former Bank of Japan official Atsushi Takeuchi stated that the market is unwilling to go against the US position, and if Bessant publicly endorses Japan's intervention measures, it will significantly reverse market expectations. Japan's chief currency diplomat, Atsushi Mimura, revealed that Japan maintains daily communication with the US, and the US fully understands and endorses Japan's policy measures.

The market is closely watching the statements from central bank officials at the June interest rate meeting, as these will be key indicators of market sentiment.

Following the US meeting, the focus of stabilizing the exchange rate has once again shifted to the Bank of Japan. Ahead of the June policy meeting, several senior central bank officials will deliver speeches, and the market will carefully analyze whether a hawkish stance translates into an interest rate hike. Kazuo Ueda emphasized the risk of inflation due to yen depreciation, leaving room for a June rate hike, and his policy communication effectively guided market expectations.

The market is focused on Kazuo Ueda's public speech on June 3 and whether the interest rate will be raised from 0.75% to 1.0% at the June 15-16 policy meeting. Three members of the Bank of Japan, including Deputy Governor Ryozo Himino, will speak this month; if they signal a rate hike, it will boost the confidence of yen bulls.

Political and fundamental pressures make it difficult to reverse the yen's long-term downward trend.

Japanese Prime Minister Sanae Takaichi has long maintained an accommodative stance. While outwardly keeping a low profile, she has strategically placed dovish members on the central bank's board of directors and publicly refuted the notion that raising interest rates would support the exchange rate. Unwilling to see the central bank tighten policy, yet wanting to stabilize the cost of living for ordinary people, she has resorted to exchange rate intervention as a compromise.

Geopolitical tensions have driven up international oil prices, and Japan's heavy reliance on energy imports has further widened its trade deficit, putting continued downward pressure on the yen. Rong Ren Goh, investment manager at East Asia Investment, stated that while currency intervention is unlikely to reverse long-term trends, it can break the downward momentum and prevent the yen from falling into disorderly depreciation, thus creating a buffer for a period of time while the external environment improves.

Summarize

Overall, Japan has built a comprehensive strategy to support the yen by relying on the central bank's hawkish shift, large-scale currency intervention, and diplomatic backing from the United States. The expectation of a June rate hike provides significant short-term support, but structural headwinds such as domestic political divisions and the energy trade deficit persist. Policy intervention can only stabilize the exchange rate in the short term and is unlikely to fundamentally change the yen's long-term weak fundamentals.

At 13:20 Beijing time, the USD/JPY exchange rate is currently at 157.08/09.