Japanese Prime Minister Sanae Takaichi issued a stern warning on Sunday against speculative activities in financial markets, pledging to take necessary measures to counter abnormal volatility. This comes after the yen experienced significant turbulence on Friday, recording its largest single-day gain in five months, sparking widespread market speculation that a "rate check" by the New York Fed hinted at potential joint US-Japan intervention in the currency market. During a televised party leaders' debate on Sunday, Takaichi explicitly stated that while the Prime Minister should not comment on market-determined matters, the government "will take all necessary measures against speculative and extremely abnormal fluctuations." Although she did not specify whether the remarks targeted bond yields or exchange rates, this statement, made amid rising Japanese bond yields and sustained pressure on the yen, has strengthened expectations for official intervention.
This sense of urgency stems from the market's sharp reaction last Friday. As previously mentioned, after traders reported that the New York Federal Reserve had called financial institutions to inquire about exchange rates, the yen staged a dramatic reversal, rallying twice during the session. The USD/JPY pair plunged approximately 1.75%, hitting a low of 155.63, its weakest level since December 24 of last year. The market interpreted the Fed's move—often seen as a precursor to intervention—as a crucial signal that the United States is preparing to assist Japan in propping up the yen. Although Japanese officials declined to confirm intervention rumors, with Finance Minister Shunichi Suzuki only emphasizing that they are "watching with a high sense of urgency," the New York Fed's involvement has ignited intense discussion on Wall Street about "joint intervention." Analysts point out that the Fed's action suggests any potential intervention would not be unilateral; this expectation has accelerated the unwinding of short yen positions and also raised concerns that intervention could spill over into the US stock market.
The reversal in the yen's trajectory on Friday began during the early European session and accelerated during the US midday trading hours. The USD/JPY pair tumbled sharply from its intraday high of 159.23, erasing all gains made since last Christmas. According to Bloomberg, the yen's surge coincided with the New York Fed contacting financial institutions to inquire about the yen's exchange rate. Such rate checks have historically been viewed as warning signals from governments to traders, typically occurring when volatility increases and verbal interventions prove ineffective. Karl Schamotta, Chief Market Strategist at Corpay, colorfully commented: "If it looks like an intervention, walks like an intervention, and quacks like an intervention, it's probably an intervention." He noted that the yen's unusually rapid movement suggests either the Japanese government is stepping in or traders are front-running an anticipated action.
Bipan Rai, Managing Director at BMO Capital Markets, believes the New York Fed's involvement changes the nature of the market game. He stated that while past rate checks haven't always led to imminent intervention, the fact that the Fed is making inquiries implies that "any potential intervention targeting USD/JPY would not be unilateral." Krishna Guha, an economist at Evercore ISI, pointed out that, under the current circumstances, US participation in foreign exchange intervention is justifiable. The shared goal, he suggested, is not only to prevent excessive yen weakness but also to indirectly stabilize the Japanese government bond market. Even without actual US intervention, such signals could accelerate the unwinding of short yen positions.
Market anxiety about intervention peaked as the USD/JPY pair approached the 160 level. This is the threshold at which Japanese authorities intervened multiple times in 2024, spending nearly $100 billion to support the domestic currency at that time. Brendan Fagan, a strategist at Bloomberg's Markets Live, noted that 160 has once again formed a psychological barrier, and the path for USD/JPY to move higher is narrowing amid fiscal uncertainty and capital outflow pressures. This market turmoil coincides with a highly sensitive period in Japanese politics. Prime Minister Takaichi's cabinet dissolved the House of Representatives last Friday, with voting scheduled for February 8, setting a post-war record for the shortest interval between dissolution and an election. Since Takaichi took office as Prime Minister last October, her promised tax-cut policies have sparked fiscal concerns, driving Japanese government bond yields to record highs while the yen has depreciated more than 4% during this period.
Valentin Marinov, a strategist at Credit Agricole, stated that when the yen exchange rate is so close to the so-called "red line," the market is like a startled bird; this situation easily leads to the belief that we are in the early stages of official intervention. Last week, volatility in long-term Japanese Government Bonds (JGBs) was also exceptionally intense. On Tuesday, the 30-year JGB yield surged by 25 basis points, indicating a supply-demand imbalance at the long end of the yield curve. However, Goldman Sachs traders Cosimo Codacci-Pisanelli and Rikin Shah noted in a report that mere market intervention cannot solve the fundamental problem. They argue that the supply-demand imbalance for long-term JGBs is severe, exacerbated by the loose倾向 of fiscal policy. Unless the Bank of Japan (BOJ) adopts a more hawkish stance or engages in quantitative easing (QE) to stabilize the bond market, the yen and JGBs will remain under pressure.
What can stop this? The Japanese Ministry of Finance should and will likely reduce the issuance of long-term bonds, but this alone is insufficient. The absolute supply of long-term JGBs remains high in the face of such weak demand. Implementing sterilized QE could stabilize the market more quickly, but ultimately, intervention in either the interest rate or foreign exchange markets does not address the root cause of the problem. Certainly, adjusting the direction of fiscal policy could change the situation, but this seems almost impossible at present. Therefore, only monetary policy remains as a viable path. Does BOJ Governor Kazuo Ueda have the capacity to take unexpectedly hawkish measures to confront the market? This week's policy meeting still indicated some hesitation on his part, but we believe the BOJ may ultimately be forced into action. For long-term bonds, it remains unclear whether such measures would be sufficient to provide support. Although current levels are already high, we believe risks remain skewed towards further price increases until the supply-demand dynamics become more stable.
Since 1996, the Federal Reserve has intervened in the foreign exchange market on only three occasions, the most recent being after the 2011 Japan earthquake. However, analysts believe current market conditions might prompt a shift in the US stance. Ed Al-Hussainy, Global Rates Strategist at Columbia Threadneedle Investments, pointed out that the US Treasury might be nervous about the spillover effects of JGB volatility into the US Treasury market and is exploring currency intervention as a stabilization tool. Leah Traub, Portfolio Manager at Lord Abbett & Co., believes that, given the US government's past concerns about currency intervention, "the US appears to be giving a green light" if Japan indeed requires more forceful action. Jason Furman, a Harvard professor and former Chair of the White House Council of Economic Advisers, commented that both the US and Japanese governments seem dissatisfied with the yen's value, and everyone is highly vigilant. However, he also cautioned that, historically, rate checks and even actual interventions have not produced lasting effects; genuine policy changes are needed to achieve that.
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