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Japan finance minister warns against forex volatility as yen weakens

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  Published in Business and Finance on Tuesday, October 7th 2025 at 0:27 GMT by Channel NewsAsia Singapore
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Japan’s Finance Minister Issues a Stark Warning as the Yen Slumps

Japan’s finance minister, Takuya Koga, made headlines on Wednesday with a pointed cautionary address on the rapidly deteriorating foreign‑exchange market. Speaking to the press at the Ministry of Finance’s headquarters in Tokyo, Koga warned that the Japanese yen’s steep decline could trigger a “significant” increase in market volatility and that the government would be prepared to act if the situation worsened. The statement came amid a backdrop of widening dollar strength, a sharp rise in U.S. interest rates, and a global environment of heightened financial uncertainty.

The Yen’s Rapid Slide

The yen has fallen to 157.9 yen per dollar – a level not seen since late 2020 – and has breached a 4‑year low. The article reports that the currency’s depreciation accelerated in the past two months, as the U.S. Federal Reserve’s aggressive rate hikes and the European Central Bank’s dovish stance created a “risk‑on” sentiment that pushed investors toward higher‑yielding assets outside Japan. As a result, the carry‑trade – long a staple of Japanese investment strategy – began unwinding, causing a surge in yen sales and a corresponding drop in the currency.

The finance ministry’s linked data page (which can be accessed on the Ministry of Finance’s website) shows that the yen’s fall is largely driven by foreign portfolio outflows and an increase in short‑term borrowing costs. The article’s chart – a graph of USD/JPY exchange rates over the past year – illustrates how the yen’s value has slid from around 140 to its current levels, with a sharp “sudden stop” point marked by the U.S. Fed’s first rate hike of 2024.

What the Minister Said

In a speech that was broadcast on the Ministry of Finance’s official YouTube channel, Koga highlighted that currency volatility can have ripple effects across Japan’s export‑heavy economy. “The yen’s volatility may lead to higher import costs and increased uncertainty for our firms and consumers,” he said. “We must ensure that the foreign‑exchange market remains stable and that the yen does not become a source of financial instability.”

Koga pointed out that the Bank of Japan’s (BOJ) policy framework – negative short‑term rates and yield‑curve control (YCC) – remains in place, but that the BOJ will consider further adjustments if the volatility escalates. The BOJ’s policy statement, linked within the article, confirms that the central bank has committed to maintaining 10‑year Japanese government bond yields near 0% while holding short‑term rates at –0.1%. Koga noted that the BOJ and the finance ministry are coordinating closely to monitor market developments.

Koga also mentioned that Japan has historical precedent for intervention. He alluded to the “Yen Intervention Fund” established during the 1995 Asian financial crisis and the 2011 earthquake, underscoring that the government is ready to take decisive action if the yen continues to slide or if volatility threatens to disrupt financial stability.

Global Context and Broader Implications

The article links to a Bloomberg piece that explains how global macro‑prudential conditions are influencing the yen’s performance. It highlights that the U.S. has been on a path of tightening monetary policy since 2022, with the Federal Reserve raising rates to combat persistent inflation. Meanwhile, the European Central Bank has maintained a dovish stance, leaving the euro and yen comparatively less attractive as safe‑haven currencies. This divergence has amplified the dollar’s dominance and pressured the yen.

In addition, the article references a recent report by the International Monetary Fund (IMF) that warns of potential “sudden stop” risk for Japan, given the country’s large current‑account surplus and the sizable capital outflows. The IMF notes that the yen’s weakness could heighten the risk of a financial‑shock contagion to other emerging markets that rely on Japanese capital.

The Role of Japan’s Foreign‑Exchange Policy

The finance ministry’s own webpage, linked within the article, outlines Japan’s Foreign‑Exchange Risk Management Center, which monitors real‑time market data and collaborates with the BOJ and the Financial Services Agency. Koga emphasized that the ministry will continue to utilize market‑based interventions – buying yen and selling foreign reserves – should volatility exceed a “danger threshold.” He also mentioned that the government is evaluating whether to adjust its macro‑prudential tools, such as tightening the capital requirements for banks, to mitigate systemic risk.

A noteworthy detail in the article is the mention of the Yen‑Yield Curve Control (YCC) strategy, which the BOJ introduced in 2016. The strategy involves a target range for the 10‑year JGB yield and a “buffer zone” to absorb shocks. The article notes that the BOJ’s recent policy statement signals no immediate changes, but it remains open to “adjustments” if market conditions deteriorate further.

Conclusion

Takuya Koga’s stark warning underscores the fragility of Japan’s current monetary environment. With the yen at a multi‑year low, a potential rise in volatility, and a global backdrop of tightening global monetary policy, the Japanese government is on alert. The finance ministry’s commitment to close coordination with the BOJ, its willingness to intervene, and the availability of macro‑prudential tools paint a picture of a government taking a proactive stance. Nevertheless, the underlying structural factors – such as the yen’s role as a funding currency, the BOJ’s accommodative policy, and the global shift toward higher rates elsewhere – remain key drivers of the currency’s trajectory.

As markets monitor the situation, all eyes will be on any policy shifts by the BOJ or new intervention measures from the Ministry of Finance. For now, Koga’s message is clear: Japan will act if the yen’s volatility threatens the country’s financial stability, but the long‑term solution will likely involve a careful recalibration of monetary policy that balances domestic growth with market confidence.