Financial Services Association, April 29 (Editor: Xiao Xiang) In early Asian trading on Monday (April 29), the yen fell below the 160 integer mark for the first time since 1990, but during the midday trading phase, it soared by nearly 400 points in just 30 minutes. This quickly sparked speculation among market traders: has the Bank of Japan interfered with the yen exchange rate?

Market data shows that after soaring nearly 300 points throughout the day last Friday, the dollar rose strongly again in early trading during the day, once breaking through the 160 mark, reaching a high of 160.20.

However, starting at 12:10 Beijing time, the US dollar exchange rate dived rapidly, falling all the way from around 159.40 to 155.37, breaking through the four integer marks of 159/158/157/156. The huge fluctuation of the yen in a short period of time has undoubtedly attracted the attention of all foreign exchange traders...

In response, some industry insiders speculated whether the Japanese authorities intervened in foreign exchange — the yen fluctuated almost as much as when Japan intervened in 2022.

Forexlive analysts said, “It looks like the Tokyo side is definitely showing their attitude to the market. I mean, I really can't think of anything or anyone else that could drive the USD/JPY trend in this way. But the question now is, if market pressure persists in the short to medium term, can they really maintain this trend?”

Of course, at present, the Japanese authorities have not responded to the sharp short-term fluctuations in the Japanese yen exchange rate, and it is still unknown whether the short-term changes in the yen were the reason for their actions.

Some industry insiders still disagree that it was the intervention of the Japanese authorities. Shoki Omori, chief strategist at Mizuho Securities, said that the sharp fluctuation of the yen against the US dollar on Monday may be due to poor liquidity in Japan's public holiday market rather than actual intervention. Due to the lack of liquidity in the yen market during the holidays, the yen is already prone to fluctuation. The trend has been too fast in the past few days, and the market may end profitably at the 160 and 159.5 levels. Algorithm-driven account position adjustments may also drive market trends.

Michael Brown, senior strategist at Pepperstone, said he is still cautious about Japan's Ministry of Finance getting involved in the foreign exchange market because we haven't heard that exchange rate checks have been carried out, which is usually a routine step before intervention takes place. Low liquidity during the holiday season can easily cause the decline in USD/JPY to intensify. Of course, the deeper the yen rebounds and the longer it lasts, people will increasingly speculate that Japan's Ministry of Finance is behind the scenes, but only foreign exchange data at the end of the month can accurately tell us the truth.

Regarding the decline in yen early in the day, many industry insiders said that the decline occurred when liquidity was scarce due to local public holidays in Japan. This may also indicate that investors were increasing their bearish positions in the yen before the US Federal Reserve's decision later this week.

The Japanese financial market is closed today due to the Showa Day holiday. Due to scarce liquidity, some position changes that had little impact in the past may trigger more drastic market conditions.

Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore, said that the sudden drop in the yen exchange rate in early Asian trading on Monday may have been a “bad luck trade.” At the same time, it also shows extreme speculative behavior in the spot and options sector, as well as the high sensitivity of investors to the risk of intervention. The market appears to be trying to push USD/JPY towards 160 without official intervention.

Looking at historical prices: What is the current situation of the yen?

It is worth mentioning that judging from the historical trend chart, the last time the US dollar was above the 160 mark against the yen dates back to the distant April 1990 mark. At the time, the wave of upward trend of the US dollar against the yen reached a high of 160.35. This also meant that the yen bears actually couldn't spend much effort in the future to further revise the market record...

However, it is important to know that the previous record of high levels of the US dollar against the Japanese yen will soon be traced back to the level of the 1985 “Plaza Accord.” In this famous “epic” agreement, the five Western countries (the United States, Japan, the Federal Republic of Germany, France, and the United Kingdom) agreed that the US dollar was seriously overvalued and agreed to depreciate the US dollar by jointly interfering in the foreign exchange market...

Today, the overall background of the global foreign exchange market is obviously very different from when the “Plaza Accord” was signed. However, the Japanese yen's recent “decline” seems to be right at that time!

As shown in the chart below, the “storm” set off in the global foreign exchange market this morning seems to be limited to the Japanese yen alone — the euro and British pound did not show such a strong downward trend against the US dollar.

In intraday trading, the exchange rate of yen against the euro has fallen below 170 yen per euro, to the lowest level since the introduction of the euro.

In the morning, the renminbi rose above 1 yuan to 22 yen against the yen, the highest level since 1992.

Where will the yen fall? Everyone is “bottomless”...

Undoubtedly, with the yen exchange rate experiencing an “epic collapse” once in decades in recent trading days, almost everyone has “no bottom” in their hearts as to where the yen will actually fall now if the Bank of Japan doesn't take action!

Fiona Lim, senior strategist at Maybank, said: “Without intervention, any attempt to catch a falling flying knife will be dangerous, especially if the Federal Reserve may suggest waiting longer to cut interest rates this week — the yen will resolutely break through 160, and the market is testing the Japanese authorities' tolerance for a sharp drop in yen.”

Many industry insiders said that the root cause of the current depreciation of the yen and the appreciation of the US dollar is that compared to Japan, the US economy is showing the “three highs” of high growth rate, high inflation, and high interest rates. Against the backdrop of a particularly clear pattern of strong and weak fundamentals, even if the Japanese authorities take intervention measures, the effects may be extremely limited.

In fact, after the Bank of Japan announced that it was “lying flat” in the shortest monetary policy statement in history last Friday — just three short sentences in disguise, the widening of the yen's decline was almost inevitable...

At the press conference after the interest rate meeting at the time, Bank of Japan Governor Kazuo Ueda downplayed the impact of the weak yen on inflation, saying that the exchange rate continues to benefit the Japanese economy by boosting demand.

George Saravelos, head of global foreign exchange research at Deutsche Bank, said, “Japan is pursuing a policy of closing one eye on the weakening of the yen. If the market becomes chaotic, the possibility of intervention cannot be ruled out, but it is also noteworthy that Kazuo Ueda downplayed the importance of the yen at the press conference and said he was not in a hurry to raise interest rates.”

Will the Japanese authorities take action?

Prior to the latest changes in the yen today, what most puzzled market participants was no doubt why the Japanese authorities have been slow to take steps to contain the yen's decline? At the beginning of this month, foreign exchange traders viewed the 152-155 mark as a “red line” that could trigger the Japanese authorities' intervention in the market, but now even the 160 mark has been unprotected for a while...

Goldman Sachs Group strategists believe that the global macroeconomic context indicates that the yen will weaken further, which may make it difficult for the intervention to succeed. “Our basic expectations of steady growth, gradual policy adjustments, and upward risk in forward interest rates are a very negative combination for the yen. The only question then is the extent to which Japanese policy makers will stop the yen from depreciating, but we think their tools are limited.”

However, Goldman Sachs strategists also added that if the yen continues to outperform other assets like last Friday, the risk of intervention will rise sharply.

Deutsche Bank's Saravelos said that the weakening of the yen is actually not necessarily a bad thing for Japan. The depreciation of the yen did not cause inflation problems; at the same time, it also boosted the value of overseas assets held by Japanese investors. He believes that the yen exchange rate continues to have a beneficial effect on the economy by stimulating demand.

Japanese policy makers have warned repeatedly before that if the value depreciates too fast, they will not sit idly by. Japan's Finance Minister Shunichi Suzuki once again reiterated after the Bank of Japan's decision last week that the government will respond appropriately to foreign exchange trends. Earlier this month, he also expressed concern about the fall in yen to US Treasury Secretary Yellen, which market participants believe has laid the foundation for intervention.

Japan's Deputy Minister of Finance, Masato Kanda, recently gave an example that the yen exchange rate fluctuates very rapidly by 10 yen within a month. However, it is worth mentioning that in the past month, the depreciation of the yen exchange rate has actually been close to this point; the year-to-date decline has exceeded 10%.

Chris Weston, head of research at Pepperstone Group Ltd., said that the Japanese authorities may say they are not targeting the exchange rate level themselves, but they do pay close attention to the trend and rate of change in the exchange rate. The current exchange rate level indicates that they must act as soon as possible, otherwise they may face a credit crisis. The foreign exchange market is dealing with them almost like the “bond vigilantes” of the past.

A “bond volunteer” refers to a bond trader who threatens to sell or actually sells a large number of bonds in order to protest or express dissatisfaction with the issuer's policies.

Editor/Somer