Eurizon SLJ Capital and Societe Generale have expressed the view that the Japanese yen's recent sustained decline not only heightens the possibility of government market intervention but also signals a potential sharp upward correction in the exchange rate. Previously, reports that Japanese Prime Minister Takaichi Sanae might dissolve the House of Representatives early for a general election triggered a wave of yen selling, pushing the exchange rate to around 159 yen per US dollar, touching its lowest level since July 2024. Investors believe this move would solidify the ruling Liberal Democratic Party's hold on power, clearing the way for further fiscal stimulus policies—changes that are seen as significant negative factors for the yen and Japanese government bonds. Eurizon CEO Stephen Jen stated in a report that the risks for the USD/JPY pair this year are "clearly skewed to the downside," adding that "intervention by officials at an appropriate time could trigger a correction." Societe Generale's chief foreign exchange strategist, Kit Juckes, shares this perspective, noting that if the yen experiences a sharp rally in the coming days, "it could present an excellent opportunity to short USD/JPY." Some market experts view 160 yen per US dollar as a potential intervention threshold, but Japanese officials have repeatedly stressed that their focus is on excessive volatility and the speed of exchange rate movements, rather than specific levels. There is no unified standard for defining "disorderly currency movements," but a senior Japanese official noted in 2024 that a move of 10 yen per dollar within a single month, or fluctuations exceeding 4% over two weeks, would constitute abnormal movements detached from fundamentals. The entity responsible for intervening in the yen exchange rate is the Bank of Japan, which acts as an agent for the Ministry of Finance; official intervention was previously triggered in 2024 when the yen weakened to 160.17 per dollar. Ivan Stamenovic, Head of G10 FX Trading for Asia Pacific at Bank of America, commented, "The market is currently heavily positioning itself through options of various tenors, attempting to price in potential sharp official reactions." Since Prime Minister Takaichi Sanae took office in October last year, there has been widespread speculation that the Prime Minister, a known supporter of reflationary policies, might hinder the Bank of Japan from raising interest rates in the near term—an expectation that has become a major factor weighing on the yen. However, Societe Generale's Juckes suggested in his report that although the Takaichi cabinet holds a majority in the more powerful House of Representatives, concerns over debt sustainability mean "the government is unlikely to pursue aggressive fiscal expansion in the short term." He believes this assessment will support a "buy-the-dip" strategy for both Japanese government bonds and the yen. Positioning data also indicates a risk of a short squeeze on the yen. In mid-2024, speculators' net short positions on the yen surged significantly, driving the USD/JPY rate above the 160 level before a rapid reversal occurred. Latest data from the US Commodity Futures Trading Commission shows that although the scale of short positions has recently moderated, it remains elevated. Simultaneously, Citibank's Yen Pain Index—a gauge tracking overall trader positioning sentiment—remains in negative territory, highlighting the current crowdedness of short yen trades.
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