Options market implies that the "intervention line" has shifted to 165, traders bet on the yen depreciating by another 1.6% before the Japanese authorities take action.

Option market data shows that in the background of the Japanese yen exchange rate approaching the lowest level in nearly forty years, the Japanese authorities may still tolerate further yen depreciation before intervening. Traders are currently willing to price the USD/JPY rising to 165, which implies that the yen still has about 1.6% depreciation space from the current level. During the Asian trading session on Thursday, the USD/JPY fell to near 162.15. Japanese Finance Minister Koizumi reaffirmed on that day that the authorities are ready to take appropriate action in the foreign exchange market when necessary, and officials will closely monitor market trends and economic data to ensure fiscal sustainability. Traders are waiting for the release of US June retail sales data later on Thursday for new momentum. Signals from the option market Several option indicators indicate that the Japanese government may be willing to tolerate further yen weakness, but only to a certain extent. The one-month risk reversal indicator shows that the premium of yen call options relative to put options is currently 176 basis points. This indicates that the market still believes that there is a risk of a sudden rebound in the yen as long as there is a possibility of intervention by the Japanese authorities. However, this premium is significantly lower than the extreme level seen in May. The implied volatility also sends a similar signal - the cost of hedging the one-month USD/JPY is less than half of the level after the intervention in April and close to a four-year low set at the end of May. This implies that traders do not believe that the probability of immediate intervention by the Japanese authorities in the coming days is high. The option expiration structure also shows that the market is prepared for further yen weakening. Within the next month, a large number of option contracts are concentrated in the 162-164 range, indicating that traders believe that the USD/JPY rising to near 165 could be an important trigger for the Japanese authorities to take action. 165 becomes the consensus intervention target on Wall Street This level is also included in the forecasts of many institutions. Goldman Sachs strategists recently raised their forecast for the USD/JPY for the next 12 months from a significant increase from 155 to 165, becoming one of the most pessimistic forecasts for the yen in Bloomberg's survey. Goldman Sachs believes that factors such as the high US-Japan interest rate differential, continued fiscal pressures in Japan, and the slow pace of interest rate hikes by the Bank of Japan will continue to suppress the yen's performance. In addition to the one-year forecast, Goldman Sachs also raised its exchange rate forecasts for the USD/JPY for the next 3 and 6 months to 162 and 163, respectively, compared to the previous forecasts of 160 and 158. Foreign exchange traders estimate that the probability of the USD/JPY rising to 165 by June next year is approximately 72%. Regarding the possible exchange market intervention by the Japanese government, Goldman Sachs believes that its effectiveness is likely to be temporary - in the absence of fundamental changes in the macroeconomic fundamentals, intervention is difficult to fundamentally reverse the yen depreciation trend. US-Japan Interest Rate Spreads: Core Driver of Yen Weakness The core factor supporting the rise of the USD/JPY remains the US-Japan interest rate spread. Higher US interest rates encourage investors to borrow low-interest yen and invest in higher-yielding dollar assets. Since early May, the spread between the US and Japan's two-year government bond yields has widened again, and the USD/JPY has also risen in tandem. This phenomenon is also reflected in the long-term option market - the one-year risk reversal indicator, which excludes the short-term intervention influences, has turned mildly bullish on the dollar since the end of 2022. The US June PPI data released on Thursday was lower than expected - 5.5% year-on-year, lower than 6.0% in May, and also lower than the market's expectations of 6.2% - putting short-term pressure on the dollar. The probability of a rate hike in July has dropped significantly from 45% the previous week to 9.6%. However, Federal Reserve Chairman Powell reiterated in his congressional testimony that he will not tolerate high inflation, and the market still believes that the probability of a rate hike in September is close to fifty-fifty. The "dilemma" of the Japanese authorities The Japanese authorities are currently facing a delicate policy dilemma. At the end of April this year, the Japanese government intervened in the foreign exchange market with nearly $74 billion to support the yen, leading to a brief rebound in the exchange rate, but the effect was short-lived. Since then, Japanese officials have repeatedly issued verbal warnings, stating that they will take action again if necessary. Even though Japan is about to enter a public holiday, and some strategists previously believed that the holiday period might be a window for the authorities to intervene in the foreign exchange market, the market has not significantly increased its bets on a yen rebound. Short-term option indicators are still far below the extreme levels seen when the market strongly speculated on government intervention. Analysts point out that the deep-seated contradiction facing the Japanese government is that a rate hike too quickly will exacerbate the debt burden already exceeding 200% of GDP and pressure the economy, while a rate hike too slowly will allow the yen to depreciate and raise import costs. Finance Minister Koizumi's statement on Thursday emphasizing "fiscal sustainability" precisely reflects this dilemma.