Yen Strengthens to 139 Yen per Dollar Amid Dollar Weakness

Japan's Response Watched Ahead of U.S. Pressure for Yen Appreciation

"Japan Faces Dilemma in Raising Interest Rates or Selling U.S. Treasuries to Buy Yen"

As confidence in U.S. assets wanes, the yen has strengthened beyond the psychological level of 140 yen per dollar.

On the 22nd (local time), in the Asian and European markets, the Japanese yen rose up to 0.7% from the previous day, reaching 139.90 yen per dollar. This is the highest level since September last year. The 140 yen per dollar was considered a psychological resistance level. It rose the most among the major G10 currencies that day. Since Trump's tariff war, demand for safe assets has surged, causing the yen to rise 7% this month.

Amid ongoing concerns about the tariff war, the previous day, President Trump threatened the independence of the Federal Reserve, intensifying the sell-off of U.S. assets. Additionally, speculation that the U.S. would pressure for yen appreciation in the Japan-U.S. finance ministers' meeting further fueled the yen's rise.

Mizuho Securities strategists stated that the yen might attempt to break last year's high of 139.58 yen due to the U.S. stock decline and the Japan-U.S. meeting.

Hideki Shibata, chief bond and foreign exchange strategist at Tokyo Intelligence Research Institute, predicted that "if the yen clearly surpasses the mid-139 level of last September, technical factors will trigger yen buying and dollar selling." The expectation is that the yen's strength will accelerate.

According to the Commodity Futures Trading Commission (CFTC) data, speculative investors bought yen at the fastest pace on record last week.

President Trump has previously accused Japan of inducing currency weakness to achieve trade surpluses.

Bloomberg pointed out that the Bank of Japan is unlikely to change its existing stance of gradual interest rate hikes despite uncertainties from U.S. tariffs, which will support yen strength. Japan's overnight index swaps estimate a 59% chance of a rate hike by the end of the year.

The market expects the U.S. to demand currency appreciation from Japan at the Japan-U.S. finance ministers' meeting in Washington this week. This is because President Trump has criticized Japan for deliberately maintaining yen weakness. U.S. Treasury Secretary Besent also mentioned looking forward to discussing tariffs, non-tariffs, and exchange rates with Japan. This expectation has driven the yen to its highest level against the dollar in seven months.

Reuters reported that the Bank of Japan could also be criticized for the slow pace of interest rate hikes. However, it pointed out that Japan has few means to move exchange rates in a way that benefits both countries.

With the yen soaring to the 140 yen per dollar range, Japan hesitates to take currency strengthening measures amid the possibility of reduced export margins due to tariffs. Additionally, to buy yen for strengthening, Japan would need to sell its U.S. Treasuries, but considering the recent U.S. Treasury plunge, the U.S. might not favor this approach.

Raising interest rates is an even more challenging task. With Trump's tariffs increasing the risk of hindering Japan's economic recovery, the Bank of Japan (BOJ) has no reason to rush interest rate hikes.

Hiroyuki Machida, director of foreign exchange and commodity sales at ANZ, said, "It's impossible for Japan to rush interest rate hikes, and even if exchange rates are discussed, there's virtually nothing either side can do."

Guest reporter Kim Jung-ah kja@hankyung.com