Yen undervalued by 20%, former Japan FX czar sees USD/JPY at 130

Japan's former top currency official warns the yen is roughly 20% undervalued and that stealth intervention risks are rising as the Bank of Japan prepares to raise rates.

The yen is undervalued by about 20% and should trade near 130 per dollar, according to Japan's former top currency official, who warned that the Bank of Japan's next move is "unquestionably" a rate hike while the Federal Reserve's tightening cycle is nearing its end.

"This is no longer a fundamental issue — expectations have become distorted," Tatsuo Yamasaki, former vice minister of finance for international affairs, said in a Bloomberg interview. "We are gradually approaching a turning point."

Yamasaki, who oversaw about 35 trillion yen in intervention from 2003 to 2004 to cap yen strength, said the interest rate differential driving the currency's slide is narrowing. The BOJ will likely raise rates multiple times, while any Fed hike would be a one-off move rather than the start of a new tightening cycle, he said. Japan's Ministry of Finance has moved beyond verbal warnings and is capable of conducting small-scale, asymmetric stealth interventions to disrupt short positions, he added.

The warning carries weight because Yamasaki accurately predicted Japan's 2022 intervention two days before it occurred. A sustained yen rally would force unwinding of carry trades, hitting global risk assets and pressuring the Nikkei, while a return to 130 would represent a roughly 20% gain from current levels.

The yen has lingered near four-decade lows against the dollar, with some market participants arguing the currency could weaken further. Monex Group's Jesper Koll and Blue Edge Advisors' Calvin Yeoh have previously said USD/JPY could test 200 if the BOJ maintains its accommodative stance.

Yamasaki dismissed concerns about Japan's fiscal health as overstated, saying the market's perception of the government's debt position does not reflect reality. As the government prepares next fiscal year's budget, investors will gain a clearer picture of the new administration's fiscal and monetary policy mix, he said.

Stealth Intervention Replaces Verbal Warnings

Japan's approach to defending the yen has shifted from public threats to a more unpredictable posture, Yamasaki said. The Finance Ministry now has the operational capability to intervene at any time without prior signaling, creating what he described as a systemic risk for yen short sellers.

"Anyone shorting the yen knows they could be taken out at any moment by intervention," he said. "Once the market truly believes the yen has a foundation to strengthen, the trend will reverse on its own."

On the diplomatic front, Yamasaki said joint US-Japan intervention remains politically difficult, but bilateral dialogue on exchange rates has reached an "unprecedented" level of closeness. Current Vice Finance Minister for International Affairs Atsushi Mimura has indicated that US understanding of Japan's intervention stance is at a level never seen before, according to Yamasaki.

Rate Path Divergence Narrows

The core driver of yen weakness — the widening gap between US and Japanese interest rates — is approaching an inflection point, Yamasaki argued. The BOJ's next policy move will be a rate increase, potentially followed by additional tightening, while the Fed's policy trajectory remains uncertain.

A narrowing of the rate differential would remove the primary structural support for the dollar-yen pair, potentially triggering a sustained reversal in the yen's fortunes. For carry trade investors who have borrowed yen to fund purchases of higher-yielding assets, such a reversal would force rapid position unwinding, amplifying currency volatility.

The last time Yamasaki issued a public warning on the yen, in 2022, USD/JPY was trading near 145. Within two days, Japan intervened for the first time in 24 years, spending about 2.8 trillion yen in a single month to support the currency. A repeat scenario would catch many leveraged funds offside, given that speculative short yen positions remain elevated by historical standards.

This article is for informational purposes only and does not constitute investment advice.