Political earthquake superimposed on central bank interest rate decision: After the Japanese yen fell below 159, the focus is now on the 162 "intervention red line".

As uncertainty surrounding the early election rises and the Bank of Japan meeting approaches next week, Japanese yen traders remain highly vigilant against the risk of exchange rate fluctuations. Earlier this week, the yen fell to an 18-month low against the US dollar as market expectations suggested that Japanese Prime Minister Seiko Hashimoto would call for elections to strengthen her position and increase government spending. Japanese Finance Minister and top foreign exchange officials have issued new warnings about the exchange rate trend. "In the past few weeks, even months, the USD/JPY has been almost stagnant, but as soon as the election news came out, it suddenly surged," said Bart Watanabe, manager of the Tokyo branch of Daifuku Bank. "The volatility will continue." The Secretary-General of the Liberal Democratic Party and the President of its ruling coalition partner revealed that Hashimoto had informed coalition officials that she would announce more details about dissolving the House of Representatives on January 19. Investors will also be watching for any signals from Bank of Japan Governor Haruhiko Kuroda about the interest rate hike path in next Friday's policy decision. The further decline of the yen has raised concerns in the market about possible government intervention to support the yen. Officials have stated that they are more concerned about the magnitude and speed of exchange rate fluctuations rather than specific levels. This week, the yen fell to 159.45, trading around 158.65 on Friday morning. "Given that 160 is a psychological barrier, the market will closely watch this level," said Cameron Sisitmans, Head of Multi-Asset at consulting firm Meidu Asia. He added that since 161.95 was the peak of USD/JPY in 2024 and triggered intervention, 162 is likely to be the next key focus point. Hashimoto's plan to expand her weak majority seats through early elections faces greater risks as the largest opposition party and former ruling coalition partner agree to form a new party. So far, the weakening yen and rising government bond yields have been due to investors betting on Hashimoto's eventual victory. The Bank of Japan's last interest rate hike in December did not provide sustained support for the yen. Sources reveal that central bank officials are increasingly concerned about the potential impact of the yen on inflation, which could affect future interest rate decisions after standing pat next week. "At the last press conference by Governor Kuroda, as there were no hawkish comments, the yen significantly weakened," said Ryojin Maruyama, FX and interest rate strategist at SMBC Nikko Securities. "We must be wary of a repeat of this scenario." Hedge funds aggressively bought USD/JPY call options, betting on the yen depreciating to 165 It is worth mentioning that amid warnings of intervention in the exchange rate from the Minister of Finance and the head of foreign exchange affairs, hedge funds continue to ignore official warnings and bet on the options market their core logic being that the Japanese authorities will only take substantial market intervention action when the exchange rate of the yen against the dollar needs to fall close to 165. Sagar Sambrani, a senior foreign exchange options trader at Nomura International Plc in London, analyzed: "The demand for investments in high-level structures of USD/JPY by hedge funds is still ongoing. We observe continued direct options buying behavior and leveraged trading structure deployment. These structures generally bet that the central bank may initiate intervention action in the 160-165 exchange rate range." He further explained that these leveraged tools include innovative products such as reverse knockout options when the underlying exchange rate hits a predetermined price barrier, the contract automatically terminates, making it more cost-effective compared to standard call options. According to data from the Depository Trust & Clearing Corporation (DTCC), in single options transactions with a nominal amount of $100 million or more on Wednesday, the volume of call options traded was more than twice that of put options. This significant difference intuitively confirms the market's strong bullish expectations for USD/JPY. It is noteworthy that the current exchange rate level has rebounded to a key point where the Japanese Ministry of Finance implemented exchange rate intervention to support the yen in July 2024, forming a subtle resonance between "policy intervention memory points" and "current market bullish sentiment."