Japanese yen starting to slip away again, will Tokyo officials step in?

Japan is estimated to have spent over $60 billion in intervening in the market recently and they don't have very much to show for it. The intervention efforts since the start of May in particular have not bore much fruit, with traders pushing back quite swiftly after the fact. And following their latest attempt last week, we're starting to see more of the same again.

USD/JPY is trading back up above the 157.00 level, as traders look to test the limits of Tokyo officials once more. The move higher comes despite a more mixed dollar, with broader markets still retaining some optimism over the US-Iran situation. While oil prices and bond yields are staying elevated, the dollar hasn't really made strides in the past week.

So, one can definitely argue that the yen side of the equation is also doing the talking here. The fact of the matter remains that the fundamental factors in play right now are overwhelmingly bearish for the yen. And as the US-Iran conflict prolongs, the negative impact will just continue to drag on.

There is a massive headwind for the Japanese economy, adding strain to both the financial and fiscal sides. Not only that, it also complicates the BOJ outlook amid cost-push inflation being put into the mix. We have covered those factors time and time again, and they continue to stick along with the Takaichi trade running in the background.

So, will we see Japan's ministry of finance decide to come back into the market again? The meeting between Bessent and Katayama today looks to be one for the optics more than anything else. However, it would be safe to assume that Bessent will also have delivered a subtle suggestion to Tokyo so as to not overdo it in terms of intervening in the market.

Besides that, the ministry of finance will also have to be wary of the IMF warning here . The issue for Japan now is that they have already shown their hand and the cards they want to play. Sure, they can tolerate a bit of pushback from the market after the recent intervention action.

However, are they going to let USD/JPY run back up closer to 160? I doubt so. It would just look extremely bad and traders will punish them even more the next time around.

That being said, it doesn't mean that Tokyo officials will find it easy to keep intervening in the near-term. Even outside of the fact of the IMF warning, their decision to intervene last week amid low liquidity conditions was arguably a poor choice of signaling. Yes, they might save some ammunition in doing so.

However, the crux of the message might not hit markets as hard: "It might sound counter-intuitive to not want to act during low liquidity periods, but there's a certain nuance to it. The main thing about intervention isn't so much so as the money but more so about the signaling. You want enough players in the market to get that signal and amplify it, so as to get the idea that "we shouldn't mess with the MOF/BOJ".

Otherwise, that signal can get lost in translation if there isn't enough liquidity follow through. And at the end of the day, it might just be passed off as more noise than an actual leading signal to traders." Now, they're left to clean up the mess from last week's efforts as the intervention play comes to naught. They perhaps might have the appetite to go big again for another one or two more times at best.

But if traders keep pushing back, Japan's ministry of finance might be put in a tough spot on thinking about what to do next. From before: "Now, everyone knows that Tokyo has one of the biggest war chests in terms of foreign currency reserves. They have a whopping $1.2 trillion to work with.

However, it is important to note that not all of this is in liquid cash deposits. In fact, over 80% of that are in securities which primarily consist of US Treasuries among other foreign government bonds. So, it is not to say that they have an "unlimited" tap to keep drinking from if they burn out their cash reserves.

If that were to be the case, it's a tricky situation for the ministry of finance. If it were to come to that, selling Treasuries may have the unintended effect of pushing US yields higher and that is an indirect tailwind for the dollar instead. So, that sort of achieves the opposite effect of what Tokyo wants; that is for a lower USD/JPY.

Of course, it's not as simple as that. However, all of this is part and parcel to the equation and it all adds up to how markets react at the end of the day. As such, that is something I reckon Tokyo officials will want to avoid for as long as they can." This article was written by Justin Low at investinglive.com.