The Japanese yen weakened against a basket of major and minor currencies during Asian trading on Wednesday, extending losses for a third consecutive session against the US dollar and falling to its lowest level since 1986, as concerns over the widening gap in long-term bond yields between Japan and the United States continued to weigh on the currency.

The yens slide to fresh four-decade lows has intensified speculation that Japanese authorities could step into the foreign exchange market to support the currency. Traders increasingly believe any intervention could take place during the upcoming US market holiday on Friday, when thinner liquidity conditions may amplify its impact.

The Price

The US dollar rose 0.2% against the Japanese yen to 162.84, the highest level since December 1986, after opening at 162.52. The session low was recorded at 162.49.

The yen closed Tuesday down 0.35% against the dollar, marking its second consecutive daily decline, pressured by rising yields on US 10-year Treasury notes.

Over the course of June, the yen lost 2.1% against the US dollar, posting a second straight monthly decline as markets continued to react to the Federal Reserves hawkish outlook.

US Dollar

The US Dollar Index climbed 0.2% on Wednesday, holding onto gains for a second consecutive session and reflecting continued strength in the greenback against a basket of global currencies.

The dollar has been supported by the recent rise in long-term US Treasury yields, particularly after key labor market data reinforced expectations that the Federal Reserve could raise interest rates at least once more this year.

Markets are now closely watching comments later today from Federal Reserve Chair Kevin Warsh at the European Central Bank Forum in Sintra, Portugal, for further clues on the outlook for US monetary policy.

Japanese authorities

Japanese Finance Minister Satsuki Katayama reiterated that the government is prepared to take appropriate action against excessive currency volatility.

Katayama added that this includes decisive measures agreed upon between Japan and the United States.

Market views

Chidu Narayanan, head of Asia-Pacific macro strategy at Wells Fargo, said another intervention remains a possibility: We believe we are approaching a point where action becomes increasingly likely.

Narayanan added that current levels are critical, not necessarily because of a specific exchange rate target, but because authorities may need to intervene to maintain credibility.

Traders view Fridays US holiday as a potential opportunity for Japanese authorities to buy yen, as lower liquidity could magnify the impact of any intervention and reduce its overall cost.

Matt Simpson, senior market analyst at StoneX, said Japans Ministry of Finance may want to intervene but faces a difficult challenge while fighting against a hawkish Federal Reserve backdrop.

Simpson added that if upcoming US economic data unexpectedly weakens and boosts expectations for monetary easing, Japanese authorities could take advantage of a softer dollar environment to intervene more aggressively. Until then, intervention threats are likely to remain largely verbal.

Japanese interest rates

Market pricing for a 25-basis-point interest rate hike by the Bank of Japan at its July meeting remains below 25%.

Investors are awaiting additional data on inflation, wages, and unemployment in Japan to reassess the likelihood of further policy tightening.