(Jan 26): The yen extended gains to as much as 1.5% against the dollar on Monday as comments from officials fuelled expectations of a market intervention after the Japanese currency’s recent slide.
The yen advanced to as much as 153.40 per dollar, the strongest since mid-November, following a warning from Prime Minister Sanae Takaichi that the government will be ready to take action.
That came after signs last Friday that the US may take the rare step to join Japan in defending the yen. Japanese stocks fell, with the Nikkei 225 Stock Average closing 1.8% lower, and most bonds gained.
“This is shaping up as a controlled, policy-engineered reset,” said Masahiko Loo, a senior fixed-income strategist at State Street Investment Management.
Japan will closely coordinate with the US and act in accordance with their joint finance ministers’ agreement last September, Chief Cabinet Secretary Minoru Kihara said at a regular briefing on Monday.
His comments echoed the Finance Ministry’s top foreign exchange official, Atsushi Mimura, who said Japan was keeping close contact with the US. Both officials declined to comment on talk of rate checks.
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“We will take all necessary measures to address speculative and highly abnormal movements,” Takaichi said on Sunday, without specifically naming the yen, or Japanese government bonds, which have been extremely volatile recently.
A modestly stronger yen would help rein in imported inflation, especially for food and energy, which has been a major concern for households. Meanwhile, a slightly weaker dollar would help President Donald Trump’s effort to reinvigorate US manufacturing.
Reports from traders that the Federal Reserve (Fed) Bank of New York had contacted financial institutions to check on the yen’s exchange rate, and recent close communication between Katayama and Treasury Secretary Scott Bessent, hint at the possibility of joint intervention.
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Finance Minister Satsuki Katayama has said Japan has a “free hand” to take action as needed, including intervention, and on Monday said she’s watching currency moves with a high sense of urgency.
Japan’s currency has strengthened more than five yen against the dollar in a stunning reversal of its weakness late last week. It’s rallied almost 3% over two trading days, the biggest gain since April last year when markets were in turmoil following Trump’s tariff onslaught.
Indications of coordinated policy warnings for both foreign exchange and bonds showed that “authorities are not defending specific levels, but are signaling that disorderly, speculative, or overly rapid moves can trigger non-linear responses”, making one-way positioning materially less attractive, said Shoki Omori, the chief desk strategist of Mizuho Securities Co in Tokyo.
That’s likely to squeeze yen short positions, which have seen the biggest increase in over a decade. Volatility in the currency market has also been accompanied by turmoil in Japanese government bonds. Yields on bonds with the longest maturities had surged to records in the early part of last week before retreating.
Japan’s benchmark 10-year government bonds rebounded further on Monday, with the yield falling two basis points to 2.235%. The government will sell 40-year debt on Wednesday in an auction that’s likely to be closely tracked after yields on that tenor last week breached the key level of 4%.
The yen’s sharp gain is also putting pressure on the dollar, and in turn helping lift some emerging-market currencies, such as the South Korean won and the Singapore dollar.
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Coordinated intervention to prop up the yen is rare. For some traders, concerted action from both Japan and the US holds echoes of the Plaza Accord, a 1985 agreement between several of the world’s largest economies that effectively devalued the dollar.
Discussion about a policy response to fixing economic imbalances driven by “persistent dollar overvaluation” came up over a year ago.
The US has only intervened in currency markets on three separate occasions since 1996, according to the New York Fed’s website, most recently selling the yen alongside other Group-of-Seven nations to help stabilise trading after the 2011 earthquake in Japan.
“Japan can’t fix the yen without risking domestic stress or global spillovers so the idea of coordination, a Plaza Accord II type of outcome, suddenly isn’t crazy to some,” said Anthony Doyle, the chief investment strategist of Pinnacle Investment Management.
“When the US Treasury starts making calls, it’s usually a sign this has moved past a normal foreign exchange story.”
The Japanese government spent almost US$100 billion ($126.95 billion) on yen-buying to prop up the currency in 2024. On each of the four occasions the yen’s exchange rate was around 160 per dollar, setting that level as a rough marker for where action might take place again.
“Ultimately, if this is a genuine attempt to anchor USD/JPY, Tokyo must follow through with actual intervention,” said Homin Lee, a senior macro strategist at Lombard Odier.
He added that both Japan and the US stepping into the market would be “an unusually overt display of bilateral coordination”.
The latest moves come as Japan gears up for a surprise election on Feb 8, with Takaichi’s promise to cut taxes on food sending shockwaves through the Japanese debt market in the past days. Her ratings have dipped in polls over the weekend, showing the risks surrounding her decision to call a snap vote.
The surge in the 40-year yield to a fresh record since its debut was the highest for any maturity of the nation’s sovereign debt in more than three decades.
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