Government intervention speculation sparked by Yen’s strong recovery

The yen strengthened sharply against the dollar on Monday afternoon in Asia, rebounding from a 34-year low reached a few hours earlier and triggering speculation that Japanese authorities had intervened to support the currency after weeks of warnings.

From about 1pm Tokyo time, the yen began to strengthen from ¥159.5 a dollar to ¥155.2 over a 50-minute period. Traders in Hong Kong said it was “highly likely” that Japanese authorities intervened.

Earlier in the day, the yen had slid past ¥160 against the dollar, a level many traders assumed would force an intervention by Japan for the first time since late 2022. Markets in Japan were closed for the first day of the country’s Golden Week holidays, resulting in thin trading.

Traders said that by Monday afternoon there was a clear perception in the market that breaching the ¥160 level had forced Japanese officials to act, though they did not have solid evidence the intervention had taken place. They added that the volatility of trading and speculation could have convinced some investors to unwind some of the huge bets they had amassed against the yen in recent weeks.

Tokyo had been warning for weeks that it was standing by to support the yen if trading became too volatile. Bank of Japan governor Kazuo Ueda said in mid-April that the central bank could act if the impact of the weak yen became “too big to ignore”.

The yen has lost about 11 per cent of its value against the dollar since the start of the year, weakening under the gap between the US’s high interest rates and near-zero rates in Japan. The wide differential could remain in place for longer than expected as the US Federal Reserve has said rates may need to stay high to tame inflation.

The “yen carry” trade, in which investors cheaply borrow the yen to fund investments in higher-yielding assets, is unlikely to start diminishing meaningfully until the Fed starts cutting rates, said Shusuke Yamada, head of Japan foreign exchange and rates strategy at Bank of America.

Yamada said in a note that holding the yen above ¥155 a dollar would require continuous interventions by Japanese authorities to buy time until the BoJ raised rates, a move that is now not expected for at least three months. He added that any intervention would need to be larger than the series of interventions Japan carried out in 2022, which totalled about $62bn.

Benjamin Shatil, JPMorgan’s senior economist for Japan, said if the Japanese authorities had intervened, the effect might be limited because investors would continue to exploit Japan’s low interest rates and use the yen as a funding currency.

“This is a busy week in terms of US policy and data, thus this is likely only the opening chapter of what may set up to be a very volatile few sessions for the yen,” he said.

When asked by reporters whether the finance ministry had intervened, Japan’s top currency official Masato Kanda said: “No comment for now.” He added, according to local media: “We’re working at the moment.”

The yen’s decline accelerated after the BoJ kept interest rates near zero on Friday, with governor Ueda saying the softer currency was having “no major impact” on Japan’s underlying inflation trend.

The weaker yen has boosted inbound tourism and fuelled a surge in corporate profits earned overseas. But business leaders in recent weeks have called on the government to act since the currency’s decline has also raised living costs and hit domestic consumption.