Is Japan about to intervene again? The Bank of Japan is reportedly testing the exchange rate, and the yen's losses have narrowed.

The Bank of Japan has reportedly conducted a bottoming-out of the exchange rate, which eased the yen's intraday decline, but market attention is rising on the possibility of further intervention in the foreign exchange market by Japanese authorities.

On Friday, September 18th, at the end of the morning session in the US stock market, Japanese media reported that the Bank of Japan had inquired about exchange rate levels with market participants. The yen immediately accelerated its narrowing of intraday losses. At the beginning of the afternoon session in the US stock market, the USD/JPY exchange rate fell back below 156.80, with intraday gains narrowing to about 0.5%, and later even approaching 0.4%.

Previously, the dollar broke through 158.00 against the yen during European trading hours, hitting a two-week low, and rose more than 1% on the day. Despite news that the Bank of Japan was testing the exchange rate, the yen is still poised to fall for the fourth consecutive trading day.

The yen's sudden rebound occurred after the Bank of Japan's September policy meeting. Two policymakers voted against the widely expected interest rate hike, drawing attention to the Bank of Japan's anticipated tightening of monetary policy.

Regarding the news of the exchange rate bottoming out, the market's core focus is on whether the Japanese authorities are preparing for further intervention in the foreign exchange market, and whether the continued weakening of the yen is reaching the policy tolerance limit.

The exchange rate bottoming out signals intervention, but this does not mean that Japanese authorities have already entered the market.

According to Nikkei, the Bank of Japan has been conducting a survey of exchange rates in the foreign exchange market, asking market participants about exchange rate levels.

Media reports indicate that after the news broke, the yen-dollar exchange rate jumped by more than 1 yen.

Currency level assessments typically involve the government inquiring with financial institutions about specific exchange rate levels or market conditions to understand the trading environment. The market often views this as a precursor to potential intervention, as such inquiries may indicate that the government is evaluating the timing of entry and the market's reaction.

However, a rate assessment does not necessarily mean the Japanese government has actually bought yen . The Bank of Japan is responsible for carrying out these operations, while the decision-making power for foreign exchange intervention rests primarily with the Ministry of Finance. Whether actual action has been taken remains to be seen and awaits official confirmation or further data.

The yen weakened for the fourth consecutive day, with interest rate hikes failing to boost the exchange rate.

The yen fell for the fourth consecutive trading day on Friday, hitting a two-week low during European trading hours. This followed the Bank of Japan's interest rate decision; although a rate hike was widely expected, two policymakers voted against it, raising doubts about the future path of rate increases.

On Friday, September 18, local time, the Bank of Japan announced after its monetary policy meeting that it would raise the policy rate to 1.25%, the highest level in 31 years. However, the decision was not unanimously approved by the members of the central bank's monetary policy committee, and the central bank's guidance on future policy tightening failed to meet the expectations of some market participants.

Following the Bank of Japan meeting, the yen came under pressure, and the dollar's gains against the yen continued to widen. European stocks briefly broke through 158.00, hitting their highest level since September 3, with a daily gain of over 1.3%.

This also highlights the dilemma facing Japan's monetary policy: even if the central bank continues to raise interest rates, if the market believes that the pace of subsequent rate hikes will be slow, the yen may still be suppressed by interest rate differentials and a stronger dollar.

Japan intervened on a large scale twice this year, with Japan and the US unusually joining forces to buy yen.

Japanese authorities have taken multiple actions this year to stabilize the yen's exchange rate. Data released by the Ministry of Finance indicates that the scale of these interventions is substantial.

• April 28 to May 27: According to data released by Japan's Ministry of Finance on May 29, the total amount of intervention in Japan's foreign exchange market during this period reached 11.73 trillion yen, which is equivalent to about 73.8 billion US dollars at a ratio of about 159 yen to 1 US dollar.
• July 30 to August 26: According to data released by Japan's Ministry of Finance on August 29, the Japanese government intervened in the foreign exchange market with 15.4 trillion yen during this period, setting a new record for monthly intervention.
• Japan and the US coordinated action at the end of July: On August 3, Japan's Ministry of Finance confirmed that on July 31, it jointly intervened with the US Treasury Department to buy yen in order to curb the recent sharp fluctuations in the yen exchange rate.

Joint intervention by Japan and the United States is particularly rare. Apart from special periods such as financial crises and major natural disasters, coordinated intervention in the foreign exchange market by the two countries is uncommon; this is also the first time since the 2011 Great East Japan Earthquake that Japan and the United States have coordinated action to stabilize the yen.

Previously, the yen had been under pressure due to the strengthening of the US dollar and the interest rate differential between Japan and the US. The Japanese authorities repeatedly sent signals to stabilize the exchange rate through verbal warnings, currency assessments, and actual interventions.

Market focus: After the initial assessment, will there be any actual intervention?

Following the news of this exchange rate bottoming-out, the yen rebounded rapidly, indicating that the market remains highly sensitive to potential actions by the Japanese authorities.

Whether this exchange rate assessment can translate into actual intervention remains to be seen and depends on the subsequent movement of the yen and the authorities' judgment. If the yen continues to weaken, the Japanese government may face further pressure to stabilize the exchange rate; at the same time, the Bank of Japan's future interest rate hike path, the outlook for US interest rates, and the dollar's performance will also continue to influence the yen's direction.

For traders, the next key questions are not only whether Japanese authorities have confirmed taking measures to test the exchange rate, but also whether there has been actual intervention by buying yen, and whether the Bank of Japan can change market expectations about interest rate differentials through subsequent policy signals.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.