The largest increase since August last year! The Japanese yen surged twice in one day, is a joint intervention in the foreign exchange market by Japan and the United States coming?

This Friday, the Japanese yen staged a sharp rebound after three consecutive declines, with two waves of rallies appearing during the trading session. The biggest intraday drop in the US dollar against the Japanese yen was about 1.75%, meaning that the yen posted its largest rally since August of last year. This sudden move has sparked widespread speculation in the market about the possibility of the Japanese government intervening in the foreign exchange market, and even potentially coordinating intervention with the US government. The first wave of yen appreciation occurred during the early European session, with the US dollar against the Japanese yen rising to 159.23, breaking above 159.00 for the first time since January 14, before quickly falling below 157.50 and dropping nearly 0.6% intraday. In the midday session of the US stock market, the yen saw a second, more intense surge, erasing the declines since Christmas last year, with the US dollar dropping to 155.63, hitting a low not seen since December 24. Japanese officials have not confirmed the speculation of intervention. Japanese Vice Minister of Finance Atsushi Misumi declined to comment on whether there was intervention in the yen, while Finance Minister Okitsugu Katayama avoided discussing intervention and only stated that he was closely monitoring the foreign exchange market with a high sense of urgency, "keeping a close watch at all times." This ambiguous statement has left the market puzzled about the reasons for the volatility. The yen's sharp rise comes at a time of political turmoil in Japan. According to CCTV News, Japan's Cabinet headed by Naoki Hisaichi passed a resolution to dissolve the House of Representatives on Friday, January 23. In the afternoon of the same day, the House of Representatives officially announced its dissolution, marking the first time in 60 years that the House of Representatives in Japan has been dissolved on the day of the opening of a parliamentary session. The election for the House of Representatives will be announced on January 27, with voting and ballot counting taking place on February 8. The gap between the formal dissolution and the voting is 16 days, setting a post-war record for the shortest period. Market Buzz Surrounding Fed Inquiry Some media reports have pointed out that the yen's rally on Friday was due to traders betting on the Japanese government's imminent direct intervention in the foreign exchange market to support the yen. Reports cited some traders as saying that the surge in the yen coincided with the New York Fed calling financial institutions to inquire about the yen exchange rate, which Wall Street viewed as a sign that the Fed was preparing to assist Japanese officials in directly intervening in the currency market to support the yen. A representative from the New York Fed declined to comment. Jason Furman, a Harvard University economics professor who served as chairman of the White House Council of Economic Advisers during the Obama administration, commented, "Both the US and Japanese governments appear dissatisfied with the value of the yen. Everyone is on high alert, waiting for any factors that could potentially change the current situation." Karl Schamotta, Chief Market Strategist at Corpay, said, "I have not heard official confirmation of buying (yens) action, but if a duck looks like, walks like, and quacks like intervention, it's likely to be intervention. The widespread decline in the dollar (against other currencies) and the unusually rapid and significant movement of the yen in the past few hours suggest that the Japanese government is interveningor traders are anticipating an action in advance." Rate Check Signals Tighten Nerves Reports indicate that the sharp reversal of the yen in the European stock market on Friday led traders to speculate that the Japanese Treasury may have conducted rate inquiries with banks. This rate check is typically seen as a signal of preparation for intervention. It has historically been viewed as a warning signal from the government to traders, indicating that they believe currency fluctuations are excessive and are prepared to buy or sell in the foreign exchange market to influence the yen's price. These inquiries usually occur when volatility increases and verbal intervention fails to curb trends. Valentin Marinov, a strategist at Crdit Agricole, stated, "This reaction indicates that when the yen's exchange rate is so close to the so-called 'red line'the level at which intervention has occurred in the pastthe market is like a startled bird. This situation easily leads to the belief that we may be in the early stages of official intervention." Marc Chandler, Chief Market Strategist at Bannockburn Capital Markets, said, "Given the lack of news, the only thing I see is this potential bearish sentiment and fear of intervention." Erik Bregar, Director of Foreign Exchange and Precious Metals Risk Management at Silver Gold Bull, noted, "Now it's the eve of the weekend, and no one has a clear grasp of what's happening. I think this is what makes the situation even more anxiety-inducing." Bipan Rai, Managing Director at BMO Capital Markets, stated that speculation about the New York Fed's yen exchange rate check drove the yen higher. "Equally important to note is that past rate checks do not necessarily mean intervention is imminent, but the fact that the New York Fed inquired means that any potential intervention against the US dollar against the yen will not be one-sided." 160 Level: Japan's Intervention "Red Line" The yen was approaching the key level of 160, the approximate level at which Japanese authorities intervened four times in 2024. In 2024, the Japanese government spent nearly $100 billion buying yen to support its currency, with the exchange rate at around 160 yen to the dollar each time they intervened, setting a rough benchmark for future potential actions. Earlier this month, Japanese Finance Minister Okitsugu Katayama and the country's top monetary official issued a warning to speculators after the yen weakened. Japan's most recent intervention in the foreign exchange market to support its currency was in 2024 when the yen fell below the 160 level against the dollar. Brendan Fagan, a strategist at Bloomberg Markets Live, pointed out, "Psychological barriers seem to be forming again. Under the pressure of fiscal uncertainty, rising yields, and continued capital outflows, the path for the dollar against the yen will become increasingly narrow." But Furman from Harvard University believes that rate checks, and even actual interventions, "historically have not had a lasting effect" and that "real policy changes are needed to achieve this." Since Naoki Hisaichi became Prime Minister of Japan in October last year, the yen has been under sustained pressure, dropping over 4% due to fiscal concerns, and hovering near levels that previously sparked verbal warnings and intervention concerns. The bond market turmoil earlier in the week highlighted investors' nervousness about Japan's fiscal situation when Hisaichi announced early elections in February and promised tax cuts, leading to record highs in Japanese government bond yields. Fed Action Sends Key Signals According to the official website of the New York Fed, since 1996, the Fed has intervened in the foreign exchange market only three times on different occasions, with the most recent being in 2011 after the earthquake in Japan when the US, together with other G7 nations, sold the yen to help stabilize the post-earthquake market. Economists Krishna Guha and others at Evercore ISI stated, "In the current situation, US intervention is reasonable, with the common goal of preventing the yen from weakening excessively, while also indirectly helping stabilize the Japanese bond market. In any case, US involvement in foreign exchange intervention is reasonable, and even without actual US intervention, it could accelerate yen short covering." Ed Al-Hussainy, Global Rates Strategist at Columbia Threadneedle Investments, said, "The market's focus on the yen stems from the volatility in the Japanese bond market earlier this week. The US Treasury may be nervous about the spillover effect of Japanese government bonds to the US Treasury market and is considering currency intervention as a stabilizing tool. Whether this risk is real remains a pending question." Leah Traub, Portfolio Manager at Lord Abbett & Co., pointed out, "Given the government's concerns about past currency interventions, if Japan does need to intervene more forcefully, it seems that the US is giving the green light." BOJ YCC Return Could Weigh on Yen; Strong Yen Could Trigger US Stock Sell-off Earlier on Friday, the Bank of Japan signaled its readiness to continue raising currently low borrowing costs amidst tense political climate. The Bank of Japan raised its growth forecast on Friday and maintained its hawkish inflation forecast, while keeping interest rates unchanged, showing confidence in the reasonable necessity of eventually raising still low borrowing costs in a mildly recovering economy. Bank of Japan Governor Haruhiko Kuroda hinted at overall inflation soon falling to below 2%, but he also left open the possibility of an early rate hike. He said, "April is a month with relatively frequent price revisions. We are interested in this, although it is not the most important factor in deciding the next rate hike, it is one of the factors." However, Kuroda expressed caution about the functioning of the market at a press conference, uncomfortable with the pace of long-term trends, and willing to take action if volatility becomes disorderly. Kuroda said the central bank might take flexible measures to smooth bond market volatility if necessary. Rich Privorotsky, Head of the Delta-One Trading Desk at Goldman Sachs, said that from a technical perspective, the Bank of Japan's actions on Friday should be seen as "maintaining the status quo under a hawkish stance." The financial blog Zerohedge noted that while Kuroda did not formally resume Yield Curve Control (YCC), this did provide a soft backstop, leading to the yen being sold off on Friday before the rebound, as if YCC is about to return, the yen could significantly weaken. A stronger yen could potentially trigger a sell-off in US stocks. Industrial Bank of France pointed out that since the summer stock market sell-off in 2024 (yen arbitrage trading unwinding), there has been a peculiar correlation between the yen exchange rate and short-term US stock market volatility. The gray line in the chart represents the return of buying the ultra-short-term volatility of the S&P 500 index since June 2025 has significantly underperformed. From this perspective, if this correlation continues, a stronger yen in trade-weighted exchange rates may become a significant catalyst for broader stock market risk aversion. This article was originally posted on Wall Street News and was edited by Li Junling for GMTEight.