(Bloomberg): An inflation indicator that is important to U.S. monetary authorities will be released on the 28th of this week, and depending on the figures it could be the next major blow to the yen and could also trigger Japanese monetary authorities to intervene in the market to buy yen.

The yen has been on the brink of falling below 160 yen to the dollar this week, hovering around its lowest level since the start of the year, and pressure is growing on Japan’s monetary authorities to take measures to halt the yen’s decline.

But traders say any hasty yen-buying intervention is risky, as the effects of such an intervention could be quickly undone, as the release of U.S. personal consumption expenditures (PCE) price index on Tuesday will hold key clues for prospects for U.S. interest rate cuts and, ultimately, the direction of the yen.

The yen has already fallen about 12% against the dollar since the start of the year and is trading near the range seen when yen-buying intervention was carried out in April and May, but so far this week Japan’s monetary authorities have only made cautionary statements.

As of 1:25 p.m. Japan time on the 26th, the yen was down 0.1% to 159.82 yen. At one point, the yen weakened to 159.90 yen.

“Even if the dollar-yen exchange rate breaks through 160 yen before the release of the PCE statistics, Japan’s monetary authorities will at least wait for the results before deciding to intervene,” said Takafumi Onodera, head of sales and trading at Mitsubishi UFJ Trust and Banking Corporation in New York. If the results are better than market expectations, volatility could rise and the dollar could strengthen and the yen could weaken rapidly toward 163 yen, forcing authorities to “check the rate” or intervene amid declining liquidity.

Masato Kanda, the Finance Ministry’s vice minister for foreign affairs, warned the market on the 24th, saying that the government is “prepared to intervene 24 hours a day.” Japan’s monetary authorities have already spent 9.7885 trillion yen in yen-buying interventions conducted from the end of April to May.

“PCE is going to be the key,” said Nick Twidale, chief analyst at ATFX Global Markets, who has traded the yen for a quarter of a century. “It would be pretty crazy to intervene before then.”

The situation remains unchanged, with the large interest rate differential between Japan and the United States being the fundamental factor behind the yen’s depreciation, and downward pressure on the yen continues despite a series of interventions.

Level and speed

In a report, analysts including Citigroup’s Osamu Takashima wrote that the decision by Japanese authorities to intervene in the foreign exchange market “will now depend on two variables, rather than one: the speed and absolute level of the yen’s depreciation,” meaning there are “almost infinite possibilities regarding the timing and level” of intervention.

Citi analysts said they expected the government and the Bank of Japan to intervene to buy yen if the dollar-yen exchange rate approached 162 yen quickly over the next few days, but that intervention was less likely if the dollar strengthened and the yen weakened at a more gradual pace.

The timing of intervention could also be key. Liquidity could thin in late afternoon trading on Tuesday in New York. Intervening during periods of low liquidity “could have a much bigger, bigger impact,” said Michael Brown, a strategist at Pepperstone Group in New York.

On the other hand, if the data released on the 28th confirms that U.S. inflation continues to trend slower, it could give the Fed a justification to cut interest rates this year, easing some of the pressure to weaken the yen. Economists expect the core PCE price index, which excludes volatile food and energy items, to grow at a slower clip in May.

Helen Given, a foreign exchange trader at Monex, said, “Given that the dollar-yen exchange rate is approaching the psychological threshold of 160 yen, there is some possibility that intervention will take place on the 28th,” and added, “The market environment seems to be in place for currency intervention to have a significant effect, but I am not yet convinced that intervention is likely unless the yen weakens further this week.”

Related article
●Forex traders unfazed by market intervention risk, with 170 yen in sight
–Risk of resuming yen-buying intervention rising; US watch list not a hindrance

Original title: ‘Crazy’ for Japan to Intervene on Yen Before Friday, Traders Say (excerpt)

–With reporting assistance from George Lei and Augusta Saraiva.

(Added the second half of the seventh paragraph)

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