Market News

BY Ruth Carson, Bloomberg News

, Bloomberg

(Bloomberg) -- The yen surged after touching its weakest level against the dollar in 34 years, igniting a debate that went unresolved over whether the Japanese government had finally intervened to support its beleaguered currency for the first time since 2022.

Amid holiday-thinned market conditions in Japan, the yen swung wildly, rallying more than 2% on Monday after earlier dropping as much as 1.2% to 160.17 per dollar. That’s the widest trading range since late 2022.

While analysts suggested the size and speed of the jump smacked of intervention, some traders questioned that conclusion and said Japanese banks sold dollars for customers as it rallied. Japan’s top currency official, Masato Kanda, chose to keep investors guessing by declining to comment.

Whether the government was involved or not, the market is clearly nervous about the potential for intervention whenever the yen slides, yet also aware the Federal Reserve could send the dollar climbing anew by sounding more worried about inflation this week. 

“The market is very jumpy and with not a lot of liquidity, the yen becomes a sharp toy to play with,” said Rodrigo Catril, a strategist at National Australia Bank. “The risk of intervention is an added factor.”

The yen has fallen more than 9% versus the dollar this year and a further decline to 160.2 would mark its lowest since 1986. Officials have repeatedly warned they may step in, but doing so could backfire given it wouldn’t alter the gulf in interest rates between the US and Japan. It has also been argued that a weaker yen is not necessarily that bad for Japan given it’s not provoking an inflation problem, can aid economic growth and is pushing up the value of overseas assets held by local investors.

Some in the market put Monday’s sharp moves down to the thin trading conditions, with Shoki Omori, chief desk strategist at Mizuho Securities Co., suggesting algorithm-driven accounts may have been partly responsible. But others saw the hand of officials at work.

“The move has all the hallmarks of an actual BOJ intervention and what better time to do it,” said Tony Sycamore, market analyst at IG Australia in Sydney. A Japanese public holiday “means lower liquidity in dollar-yen and more bang for the BOJ’s buck.”

Kyle Rodda, a strategist at Capital.com in Melbourne, called trading “pretty wild” as investors hurried to cover short positions and speculative traders sought to benefit from the swings.

Fed Risk

The US central bank is scheduled to hold a policy meeting during which it may signal the need to keep interest rates elevated amid sticky inflation — a move that would likely support the dollar and undermine the appeal of yen assets. But behind the fundamentals which point to a weaker yen is the risk that Japan steps in to support the currency, as it did in 2022.

“Should there be no intervention, it would be dangerous to catch a falling knife, particularly with the Fed likely to signal a longer wait for cuts,” said Fiona Lim, senior strategist at Malayan Banking Bhd. “Momentum is definitely there for dollar-yen to move decisively above the 160 and markets are testing Japan’s tolerance for a sharp yen decline.”

The Bank of Japan last week indicated financial conditions will remain easy, though policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast. Earlier this month, the nation’s finance minister also flagged concerns over the yen’s decline to US Treasury Secretary Janet Yellen, which market participants saw as laying the groundwork for intervention.

Japan’s Kanda has given an example of a 10-yen move over one month as a rapid one. Japan’s currency has weakened by as much as 8 yen per dollar over the last month, but it fell over 2% last week alone and is down more than 10% year-to-date.

While the BOJ has brought local rates out of negative territory, they are still far from levels that would tempt investors from the higher yields on offer in the US and other countries.

“The current pace of depreciation is less than in 2022 so the intervention response could be less intense,” wrote Vincent Chung, associate portfolio manager at T. Rowe Price. “Additionally, market participants have priced in the possibility of intervention by authorities following the BoJ meeting in May, as indicated by option pricing.”

Yen Watchers Ask When Japan Will Step In as Slide Accelerates

Bets in the options market helped to exacerbate the yen’s drop on Monday, with barriers against the dollar and euro being targeted on the view intervention risks were likely low during a Japan holiday, according to Asia-based traders. Against the euro, the yen on Monday fell beyond 170 to the weakest since the creation of the common currency, before recovering ground.

“Pressures will remain on the currency until we get more downbeat growth and inflation data in the US and clearer hawkish shift at the BOJ,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore. “We still think we are quite close to the Finance Ministry’s intervention, in light of the recent rhetoric on excessive currency market moves.”

--With assistance from Michael G. Wilson, Matthew Burgess, Erica Yokoyama, Emi Urabe, Neil Chatterjee and Vassilis Karamanis.

(Adds context and updates prices throughout.)