Yen extends rally as Takaichi warning raises intervention risk

TOKYO – The yen extended its gain on Jan 26 as traders started the week on heightened alert for Japan intervening in the market following the currency’s recent slide.

It advanced as much as 0.8 per cent to US154.43 per US dollar in early Asian trading, its strongest level in more than a month. Against the Singapore dollar, the yen rose 0.5 per cent to 121.868 as at 9.15am.

The yen’s rally follows a warning to the market on Jan 25 by Prime Minister Sanae Takaichi and signs on Jan 23 that the United States may join Japan to defend the yen.

“We will take all necessary measures to address speculative and highly abnormal movements,” Ms Takaichi said, without specifically naming the yen, or Japan’s volatile government bonds. 

While she prefaced the remarks by saying it was not for her as prime minister to comment on “matters that should be determined by the market”, the Finance Minister has said Japan has a “free hand” to take action as needed, including intervention. 

Jan 26’s move extends a recovery from a zone of heightened risk of intervention near 160 per dollar that the yen entered on Jan 23. 

That weakness began reversing at the end of the Tokyo trading session amid speculation of intervention. It gathered pace during the US day as traders reported that the Federal Reserve Bank of New York had contacted financial institutions to check on the yen’s exchange rate. 

The inquiries from the Fed, and recent close communication between Finance Minister Satsuki Katayama and Treasury Secretary Scott Bessent, suggest to traders the possibility of joint intervention. 

“Rate checks are typically the last warning before such action takes place,” said Mr Michael Brown, senior research strategist at Pepperstone Group, referring to intervention. “The Takaichi administration appears to have a much, much lower tolerance for speculative FX moves than their predecessors.”

Reports of rate checking are likely to make the market leery of trying to weaken Japan’s currency further, squeezing yen short positions, which have seen the biggest increase in over a decade. 

Volatility in the currency market has 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.

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 US 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 Mr Anthony Doyle, chief investment strategist at Pinnacle Investment Management. “When the US Treasury starts making calls, it’s usually a sign this has moved past a normal FX story.”

The Japanese government spent almost US$100 billion (S$127 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 Mr 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”. 

“160 is a simple, round number that cuts through noisy political headlines to many Japanese voters and market commentators who are certain to treat it as a sort of major crisis indicator ahead of the Lower House snap election in February,” Mr Lee said.

Japan is gearing up for a surprise election on Feb 8, with Ms Takaichi’s promise to cut taxes on food sending shockwaves through the Japanese debt market in the past days. The 40-year rate rocketed past 4 per cent to a fresh high since its debut and a first for any maturity of the nation’s sovereign debt in more than three decades.

“Intervention only delays, but not reverses the yen depreciation trend in the current macro set-up where there is focus on increased fiscal spending,” said Mr Rong Ren Goh, a fixed-income portfolio manager at Eastspring Investments. BLOOMBERG