The sudden and brief rise in the yen on Tuesday night raised doubts about Japanese authorities' intervention. USD/JPY experienced a brief reversal in early trading in New York on Tuesday, falling from 154.76 to a daily low of 154.04 within a few minutes, before regaining most of its decline. But this is probably because traders are becoming more sensitive to the risk of Japanese policymakers interfering in the foreign exchange market, not because the government has taken any action in the foreign exchange market.

USD/JPY is at a 34-year high, but the pair's upward trend remains unaffected. Any sharp fluctuations at this point make traders wary of whether Japan's Ministry of Finance interfered — the last time Japan's Ministry of Finance intervened was in September and October 2022.

Nomura forex strategists Yujiro Goto, Yusuke Miyairi, and Jin Moteki wrote in a report on Tuesday: “As USD/JPY approaches the 155 milestone level, the market has become more sensitive to a sudden drop in USD/JPY. What we value more is that the dollar did not continue to fall against the yen after the initial decline.” They added that large fluctuations in exchange rates may make the market more aware of possible intervention and “limit the pace at which the yen continues to depreciate.”

Helen Given, a foreign exchange trader at Monex Inc., also believes that the yen's price fluctuation on Tuesday was a result of the market becoming more sensitive to the risk of intervention. “As the dollar approached 155 against the yen, traders bought (yen) on dips to avoid getting into trouble,” said Given.

Strategist Nomura said that the move was reminiscent of another brief but larger decline in the US dollar against the yen in October last year. At that time, it also raised questions about Japan's Ministry of Finance's possible intervention in the foreign exchange market. Official data later confirmed that the Japanese authorities did not directly interfere in the foreign exchange market.

One reason traders are concerned about the 155 level is that options expire, making it a key short-term resistance against USD/JPY's upward trend. According to recent data from the American Depository Trust and Clearing Company, a large number of options have expired in recent days, and the exercise price is or slightly higher than 155.

Chidu Narayanan, chief Asia Pacific strategist at Wells Fargo Securities in Singapore, said that any intervention could push down the dollar against the yen, and given that there are too many short positions in the yen, the intervention may be effective. However, he warned in a customer report released before the dollar fell against the yen in early trading on Tuesday that “any decline could be bought and push the pair back upward.”

This time the dollar fell much less from high to low against the yen

The price movement seemed to validate Narayanan's point. The dollar fell less than 0.5% from an intraday high to a low on Tuesday, after which traders pushed the pair sharply higher. In contrast, on October 3 of last year, the fluctuation from peak to bottom was much more intense, more than 1.8%.

Notably, the hedge fund established the largest short position in yen in 17 years. In the past 13 weeks, the fund has increased its net short position in yen for 1 week. This increases the possibility that when the yen rebounds from a 34-year low, a bears' recovery could lead to a strong rebound. Since short positions in yen are so tight, there may be no need for much stimulus to push the fund to cut its positions and cash out.