The Japanese yen edged lower against a basket of major and minor currencies during Asian trading on Wednesday, extending its losses for a third consecutive session against the US dollar after trading beyond the 163-per-dollar level for the first time since 1986. The move has fueled speculation that Japanese authorities are nearing another intervention to support the currency and curb its excessive weakness.

The rally in global oil prices to six-week highs, driven by concerns over supply disruptions in the Middle East, has also renewed fears of rising inflationary pressures in Japan. That has strengthened expectations that the Bank of Japan will continue tightening monetary policy, with markets increasingly pricing in another interest rate hike at its October meeting.

The Price

The US dollar rose less than 0.1% against the yen to 163.22, after opening at 163.15. It touched an intraday low of 163.03.

The yen ended Tuesday down 0.4% against the dollar after falling to a fresh 40-year low of 163.24, pressured by the continued military escalation between the United States and Iran.

Japanese authorities

The latest decline in the yen has once again brought the currency into sharp focus after it traded beyond the 163-per-dollar level for the first time since 1986, reinforcing expectations that Japanese authorities may intervene in the foreign exchange market.

Japanese Finance Minister Satsuki Katayama said the government "stands ready to take decisive action in the foreign exchange market if necessary," adding that officials are closely monitoring currency movements, while declining to comment on any specific exchange rate level.

Japan carried out its largest-ever currency market intervention in April and May after the dollar climbed above 160 against the yen.

However, the impact of those interventions gradually faded, while Japanese officials have recently toned down their public warnings, preferring the element of surprise to keep markets guessing.

The positive impact of earlier official comments suggesting that Japan's Government Pension Investment Fund could shift part of its overseas investments into domestic assets has also faded, with market attention returning to the possibility of direct yen-buying intervention by Japanese authorities.

Views and analysis

HSBC analysts, led by Global Head of FX Research Paul Mackel, said in a report released last week that they believe Japan could intervene in the foreign exchange market again in the near future.

The analysts added that any intervention is unlikely to have a lasting impact unless the Bank of Japan delivers several hawkish interest rate hikes, the Federal Reserve resumes cutting interest rates, or market sentiment toward Japan's fiscal outlook changes.

They also said their base-case scenario is for the dollar-yen exchange rate to remain within a new, higher trading range of roughly 160 to 165 per dollar, with the upper end capped by periodic intervention from Japanese authorities while negative real interest rates in Japan continue to provide underlying support for the pair.

Global oil prices

Oil prices rose more than 1% on Wednesday, extending gains for a second consecutive session to reach six-week highs as concerns over supply disruptions in the Middle East intensified amid continued military escalation between the United States and Iran, along with Houthi threats targeting Saudi-linked ships and oil tankers.

Iran conflict update

The US military announced the completion of its eleventh consecutive night of airstrikes against Iranian military targets.

The strikes targeted command centers, logistics facilities, drone storage sites, and naval equipment as part of efforts to protect international shipping through the Strait of Hormuz.

Iran said it would continue its military response, including attacks on US military sites and bases across the region.

US President Donald Trump warned that a suspected Iranian nuclear site in the Jabal Al-Fas area could soon face a major military strike.

Tehran responded that any attack on its nuclear facilities would officially mark an expansion of the war across the entire region.

Mediation efforts led by several regional parties, including Pakistan and Qatar, remain underway in search of a ceasefire, although no formal agreement or new truce has yet been announced.

Japanese interest rates

With global oil prices continuing to rise, markets have increased the probability of a 25-basis-point Bank of Japan rate hike at this month's meeting to above 35%.

Markets are now pricing the probability of a quarter-point rate increase at the Bank of Japan's October meeting at more than 95%.

Investors are awaiting additional Japanese inflation, employment, and wage data that could reshape expectations for the Bank of Japan's policy outlook.