Mayor Takashi Sanae sends a signal, the US and Japan are ready to intervene in the market, is the arrow on the string?

Japanese Prime Minister Sanae Takichi issued a stern warning on Sunday against speculation in financial markets, promising to take necessary measures to address abnormal fluctuations. Prior to this, the Japanese yen experienced violent fluctuations on Friday and recorded its largest increase in five months. The market widely speculates that the "inquiry" action by the New York Fed implies that the US and Japan may be preparing to intervene in the currency market together. In a televised party debate on Sunday, Sanae Takichi clearly stated that while the Prime Minister should not comment on matters determined by the market, the government "will take all necessary measures to deal with speculative and extremely abnormal fluctuations." Although she did not specifically indicate whether it was targeting bond yields or exchange rates, this statement comes as Japanese bond yields rise and the yen continues to be under pressure, reinforcing expectations of official intervention. This sense of urgency comes from the dramatic market reaction last Friday. Prior to this, after traders reported that the New York Fed had called financial institutions about the exchange rate, the yen rate experienced a major reversal, surging twice during the day, with the US dollar against the yen plunging by about 1.75% at one point, hitting a low since December 24 of last year at 155.63. The market interpreted this move by the Federal Reserve as a key signal that the US is prepared to help Japan support the yen. Although Japanese officials have refused to confirm intervention rumors, Japanese Finance Minister Takayuki Kajiyama only emphasized the need to "keep a close watch at all times." However, the New York Fed's intervention has sparked discussions in Wall Street about "joint intervention." Analysts point out that the Fed's actions imply that potential intervention will no longer be one-sided, leading to accelerated unwinding of short positions on the yen and concerns about the intervention possibly affecting the US stock market. Fed's "inquiry" leads to speculation of joint intervention The reversal in the yen's movement last Friday began during the European morning session and accelerated during the US stock market session. The US dollar against the yen sharply declined from an intraday high of 159.23, erasing the decline since last Christmas. According to Bloomberg, the yen's surge coincided with the New York Fed calling financial institutions to inquire about the yen exchange rate. Such exchange rate checks have traditionally been seen as warning signals from the government to traders, usually occurring when volatility increases and verbal intervention fails. Corpay's Chief Market Strategist Karl Schamotta wittily commented, "If a duck looks like a duck, walks like a duck, and quacks like a duck in terms of intervention, it's likely being intervened in." He pointed out that the rapid shift in the yen's movement indicates that the Japanese government is intervening, or traders are anticipating an action in advance. Bipan Rai, Managing Director at BMO Capital Markets, believes that the New York Fed's intervention changes the nature of the market game. He stated that while past currency checks do not necessarily mean intervention is imminent, the fact that the Fed inquired implies that "any potential intervention in the US dollar against the yen will not be one-sided." Economist Krishna Guha from Evercore ISI pointed out that US involvement in forex intervention is reasonable under the current circumstances, with the shared goal of not only preventing the yen from weakening excessively, but also indirectly stabilizing the Japanese bond market. Even if there is no actual US intervention, this signal could accelerate unwinding of short positions on the yen. Approaching the "red line" of 160 Concerns about intervention peaked as the US dollar approached the 160 level against the yen. This level was seen when Japanese authorities intervened multiple times in 2024, spending nearly $100 billion to support their currency. Brendan Fagan, strategist at Bloomberg Markets Live, pointed out that 160 has once again become a psychological barrier, and as fiscal uncertainty and capital outflows pressure mount, the path for the US dollar to rise against the yen is becoming narrower. This market turmoil comes at a highly sensitive time for Japanese politics. The cabinet of Sanae Takichi dissolved the lower house of the Diet last Friday and will hold elections on February 8, setting a record for the shortest interval from dissolution to voting in post-war history. Since assuming office as Prime Minister in October last year, Sanae Takichi's tax reduction policies have raised fiscal concerns, leading to a historic high in Japanese government bond yields and a decline of over 4% in the yen exchange rate during this period. Valentin Marinov, strategist at Credit Agricole CIB, said that when the yen exchange rate is so close to the so-called "red line," the market is like a frightened bird, easily leading to the belief that official intervention is in its early stages. Last week, long-term Japanese government bond volatility was also exceptionally high. The 30-year Japanese government bond yield surged by 25 basis points on Tuesday, indicating a mismatch between supply and demand in the long end of the yield curve. However, traders Cosimo Codacci-Pisanelli and Rikin Shah at Goldman Sachs pointed out in a report that mere market intervention cannot solve the underlying problems. They believe that the severe imbalance between supply and demand in long-term Japanese government bonds, exacerbated by loose fiscal policies, remains a serious issue. Unless the Bank of Japan takes a more hawkish stance or engages in quantitative easing (QE) to stabilize the bond market, the yen and Japanese bonds will still face pressure: What can stop this situation? The Japanese Ministry of Finance is expected to reduce the volume of long-term government bond issuance, but this is not enough. In such a weak demand situation, the absolute supply of long-term Japanese government bonds remains high. Implementing shock-and-awe quantitative easing policies can stabilize the market more quickly, but ultimately, intervention in interest rates or foreign exchange markets cannot address the root cause of the problem. Of course, a change in fiscal policy direction can change the situation, but that is almost impossible at the moment. Therefore, only monetary policy remains. Is Governor Kuroda capable of taking unexpected hawkish measures to address the market? Although this week's meeting still shows hesitation, we believe the Bank of Japan may eventually be forced to take action. Regarding long-term government bonds, it is not yet clear whether these measures are sufficient to provide support. Although current levels are already high, risks continue to favor further price increases until supply and demand relationships become more stable. Why the US may "give the green light" Since 1996, the Federal Reserve has intervened in the foreign exchange market only three times, with the most recent being after the 2011 earthquake in Japan. However, analysts believe that the current market environment may prompt the US to change course. Ed Al-Hussainy, Global Rates Strategist at Columbia Threadneedle Investments, pointed out that the US Treasury Department may be nervous about the volatility in Japanese government bonds spilling over to the US Treasury market and is considering currency intervention as a stabilizing tool. Leah Traub, Portfolio Manager at Lord Abbett & Co., believes that considering the government's past concerns about currency intervention, if Japan indeed needs more forceful intervention, "the US seems to be giving the green light." Jason Furman, a professor at Harvard University and former Chair of the White House Council of Economic Advisers, commented that both the US and Japanese governments appear dissatisfied with the yen's value, with both being highly vigilant. However, he also warned that historically, exchange rate checks or even actual intervention have not had lasting effects and genuine policy changes are needed to achieve this. This article is reproduced from Wall Street News, edited by GMTEight: Chen Yufeng.