Japanese yen surges sharply: Markets estimate that Japan intervened in foreign exchange trading
The yen's surge has reignited assessments that authorities in Japan entered the foreign exchange market to curb the currency's weakening. The Bank of Japan is expected to publish its interest rate decision tomorrow, with expectations of no change.
The Japanese yen surged sharply against the dollar during today's trading, strengthening by up to 2.6% to a level of 159.21 yen per dollar. The sharp rise sparked speculation that authorities in Japan intervened in the foreign exchange market to support the local currency.
This is the sharpest daily rise for the yen since April, following a period in which the Japanese currency weakened to its lowest levels in four decades. The weakening of the yen was mainly due to the large interest rate gaps between Japan and the USA, as the Federal Reserve maintained a high interest rate while the Bank of Japan moved slowly in the process of raising interest rates.
The sharp move comes on the eve of the Bank of Japan's interest rate decision, with markets almost certain that the bank will leave the interest rate unchanged. Therefore, the main focus will be on the bank's messages regarding further policy tightening and the timing of the next interest rate hike.
The sudden strengthening of the yen, without a clear economic factor, increased assessments that the Japanese Ministry of Finance might act again in the foreign exchange market — as it did in the past with the goal of curbing sharp declines in the currency. However, authorities in Japan usually do not confirm or deny intervention actions immediately.
For global markets, a rapid strengthening of the yen may be significant even beyond Japan, as many investors financed investments in various assets through loans in yen at a low interest rate — a strategy known as Carry Trade. A sharp rise in the Japanese currency could lead to the closing of such positions and increase volatility in the markets.
Will intervention help at all
The strengthening of the yen today comes after the Japanese currency struggled to recover in recent months, even after unprecedented intervention by authorities in Japan. The Japanese Ministry of Finance invested 11.73 trillion yen (about 73.2 billion dollars) between April 28 and May 27, after the dollar crossed the 160 yen level for the first time.
Despite the unusual scale of the intervention, the yen remained under pressure, and the dollar returned to strengthen against it in the recent period. According to the reserve data of the Japanese Ministry of Finance, it is possible that Tokyo financed the last operation by selling foreign assets held by the state, including US government bonds.
Intervention in the foreign exchange market is carried out by selling dollars and buying yen, a move aimed at increasing the value of the local currency. However, past experience shows that without a change in fundamental factors — mainly the large interest rate gaps between the USA and Japan — it is difficult for authorities to change the currency's trend for a long time.
Now, after the yen weakened to the lowest levels in four decades, investors are trying to assess whether the sharp rise recorded today signals further intervention by the authorities or a change in expectations regarding the Bank of Japan's policy.
The timing is particularly significant, as the Bank of Japan is expected to publish its interest rate decision tomorrow. Although the market is almost certain that the interest rate will remain unchanged, any signal regarding the acceleration of interest rate hikes in the future could provide additional support to the yen and reduce the interest rate gaps compared to the USA.
