The Japanese yen rebounds sharply! The market suspects official intervention, but Japan's finance minister refuses to acknowledge it: "Maintaining close and urgent attention at all times."

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The Japanese financial market experienced a highly tense day on Friday, with the yen-dollar exchange rate fluctuating drastically for a short period after Governor Kazuo Ueda's press conference—first falling then rising—sparking widespread speculation that the authorities may have conducted exchange rate checks or intervened. This volatility capped off an already tense week with suspense.

After Bank of Japan Governor Kazuo Ueda's press conference following the policy decision, the yen initially depreciated to 159.23, then swiftly reversed within a few minutes, surging as high as 157.37—a gain of 0.7%, with an intraday fluctuation exceeding 1.2%. This sudden reversal caught the market off guard, prompting traders to speculate about the reasons behind it.

In interviews after the press conference, when Finance Minister Katayama Katsuki was asked whether Japan had intervened in the market, she declined to respond, only stating "We are keeping a close and urgent watch," sending the market's assessment of the volatility into a haze. The yen's proximity to the critical 160 level has investors highly alert—this is roughly where Japanese authorities intervened four times in 2024.

The heightened market tension is rooted in the yen's continued approach toward sensitive levels. Valentin Marinov, strategist at Crédit Agricole, commented:

"It's easy to conclude that we might be in the early stages of official intervention. The market's reaction also shows how tense things get when the yen trades so close to the 'line in the sand'—the level where intervention had previously occurred."

Kazuo Ueda sends mixed signals

The Bank of Japan on Friday kept its policy rate unchanged at 0.75% but raised medium- to long-term inflation forecasts. According to previous articles by WallstreetCN, Ueda said at the press conference that if the economic situation develops as expected, rates will continue to rise, underlying inflation will gradually increase, and financial conditions will remain loose after the December hike.

He specifically mentioned that the extent of price increases by companies in April—when Japan's new fiscal year begins—will be one of the factors the policy committee considers when discussing potential rate hikes. This comment was interpreted by the market as somewhat dovish, leading the yen to weaken afterward.

Regarding the recent rapid rise in long-term interest rates, Ueda stated that the BOJ will flexibly conduct bond operations under special circumstances and may undertake actions to encourage the formation of stable yields.

Fukuhiro Ezawa, Head of Tokyo Markets at Standard Chartered Bank, said:

"Ueda's remarks were initially read as slightly dovish for rate hikes, and dollar/yen rose. The pair then fell back, prompting market speculation that the move could reflect intervention or exchange rate checks."

160 Level: The "Line in the Sand" for Intervention

The Japanese government spent nearly $100 billion in 2024 buying yen to support the currency. The exchange rate at the four interventions was roughly at 160 yen per dollar, setting a rough marker for future possible action.

Marinov at Crédit Agricole noted that current market reactions indicate that investor nerves are tight when the yen trades near previous intervention levels.

Tominaga Takayuki, trader at Tokyo Central Tanshi FX, said, "In addition to the possibility of rate checks, the yen's weakness after Ueda's press conference may have triggered pre-planned trades. Although reversing the yen's downtrend is difficult, market caution has clearly increased. If rates approach 160, expectations for intervention may intensify next week."

Exchange rate checks have long been seen as an official warning signal to traders, indicating authorities view volatility as excessive. This usually happens when volatility rises and verbal intervention fails to curb the trend. In rate checks, the Bank of Japan typically calls dealers to ask for quotes on the yen versus other currencies—a step before actual trading.

Sohei Takeuchi, senior fund manager at Sumitomo Mitsui DS Asset Management, noted that once rates break past 159, "Japanese authorities' vigilance may have been heightened," pointing to the likelihood of rate checks. He said that if authorities go beyond checks and actually intervene by buying, the yen could further strengthen and hold at higher levels for longer.

Markets Remain Tense Throughout the Week

Japanese markets have been tense all week. Prime Minister Sanae Takaichi promised to suspend the 8% tax on purchases of food and non-alcoholic drinks for two years if she and the ruling LDP win the February 8 early election.

Earlier this week, Japan's 40-year government bond yield hit a record high, amplifying market concerns that looser government spending could raise the nation's debt burden—Japan has the largest debt among developed economies. These concerns have also weighed on the yen.

After Katayama's remarks, the yen traded near 157.97, recovering part of its losses. The market will continue to closely monitor the yen's movement next week, as well as whether authorities will take further action as rates approach the critical 160 level.

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