The Tokyo Stock Exchange building is seen in Tokyo, Japan. Reuters

Japan’s finance minister (FM) issued his strongest warning to date on Wednesday about yen weakness as it fell to a 34-year low against the dollar, saying authorities could take “decisive steps”, language previously used before intervention.

Shunichi Suzuki previously used the phrase “decisive steps” in autumn 2022 when Japan last intervened in the market to stem weakness in its currency.

Suzuki made the remarks on Wednesday shortly after the dollar spiked on strong US data, nudging the Japanese yen to a 34-year low and into the zone that triggered official market intervention a year-and-a-half ago.

The yen traded at 151.97 per dollar in the Asia session, down about 0.2 per cent and weaker than 151.94 where Japanese authorities stepped in during October 2022 to buy the currency.

It hit the weakest level since the middle of 1990, around the time Japan’s asset bubble burst, which was followed by decades of economic stagnation.

“Markets are I suppose, gingerly testing to see where’s the line for Tokyo,” said Christopher Wong, a currency strategist at OCBC in Singapore. “I think that the risk of intervention is quite high, because this is a new cycle high. And given the warnings so far, I think that if Tokyo (does) not act, it’s just going to encourage people to push (dollar/yen) a lot higher in the next few days.”

Suzuki said the government is closely watching market moves with a high sense of urgency following the yen’s fall.

Bank of Japan Governor Kazuo Ueda on Wednesday said the central bank would also keep a close eye on currency moves and their impact on economic and price developments.

“Currency moves are among factors that have a big impact on the economy and prices,” Ueda told parliament, when asked about the yen’s recent sharp declines.

The weaker yen makes imports more expensive, fuelling inflation, and makes exports from the world’s fourth largest economy cheaper.

National Australia Bank forex strategists said ripples from the weak yen were being felt elsewhere and noted a recent sharp drop in China’s yuan may be a policy response to protect the competitiveness of Chinese exports.

“It’s not just a yen story. It has a domino effect that causes downside risk to other currencies,” said NAB strategist Rodrigo Catril.

The yen’s slide has continued unabated since Japan’s historic shift in monetary policy last week.

While the BOJ raised interest rates for the first time since 2007, markets now believe the next hike may be some time away.

That has reinforced the yen’s use in carry trades, in which investors borrow in a currency with low interest rates and invest the proceeds in a higher-yielding currency. Japanese investors can also get much stronger returns abroad, depriving the yen of support from repatriation flows.

For the current quarter that ends later this week, the yen is the worst-performing major currency, down more than 7% on the dollar.

The Bank of Japan must proceed “slowly but steadily” toward normalising its ultra-loose monetary policy, a hawkish board member Naoki Tamura said, flagging the potential for another interest rate hike if inflationary pressures heighten.

But he also said that the risk of the BOJ being forced to tighten monetary policy aggressively to tame excessive price rises remained small.

“There’s no set formula in terms of conditions for raising rates again,” Tamura told a news conference on Wednesday.

The bank might be able to consider hiking rates if the likelihood of achieving its 2 per cent inflation target rises further, or if trend inflation or upside price risks heighten, he added.

The yen and Japanese government bond yields fell on Tamura’s remarks, which were short of any clear, hawkish hints about the timing of another rate hike.

While warning of some weak signs in consumption and capital expenditure, Tamura said Japan’s economy was likely to continue recovering moderately, and sustain a positive cycle in which rising wages push up inflation rates.

“In my view, the central bank’s ultimate goal is to bring interest rates back to levels where they can be pushed up or down to adjust demand, and influence price moves,” Tamura said in a speech delivered before the news conference.

The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy last week, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.

That said, the side-effects of prolonged easing will remain as short-term interest rates are still stuck around zero and long-term rates are not yet driven fully by market forces, Tamura said.

A former commercial bank executive, Tamura is considered by markets as one of the board’s hawkish members. He was one of seven members who voted for last week’s decision to end negative rates. The BOJ board consists of nine members including the governor and two deputy governors.