Intervention sword is held high, fear that the Japanese yen storm may sweep through interest rate differential trading.

The market is increasingly concerned about the threat of Japanese authorities intervening to support the yen, as the yen weakened after last week's interest rate hike aimed at curbing inflation. A weaker yen will exacerbate the price pressures that the Bank of Japan is trying to control and may prolong its tightening cycle. Historical experience shows that intervention actions can have serious impacts on the stock market, with Japan's last intervention severely damaging its stock market. Given that the current stock market gains are more extreme than they were 18 months ago, the market has reason to worry that a new round of intervention may trigger market volatility. Stock market fluctuations will increase demand for the yen, seen as a low-risk asset, and may lead to the rapid unwinding of carry trades based on selling the yen for financing. As investors seek safe havens in gold, the euro, and the Swiss franc this year while avoiding the dollar, intervention actions to support the yen may have a greater cascading impact on these assets with lower liquidity than the dollar, resulting in more intense and rapid fluctuations.