The largest increase since last August! The yen surged twice in one day—will joint Japan-U.S. intervention in the foreign exchange market happen soon?
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This Friday, after three consecutive declines, the Japanese yen staged a dramatic rebound with two waves of rallies during the session. USD/JPY saw an intraday maximum drop of about 1.75%, marking the yen’s largest gain since August last year. This sudden movement sparked widespread market speculation about potential intervention by the Japanese government in the foreign exchange market, and even possible joint intervention with the U.S. government.
The first wave of the yen’s rally appeared in early European trading. USD/JPY had earlier risen to 159.23 at the start of the European session, breaking above 159.00 intraday for the first time since January 14, before plunging and swiftly falling below 157.50 in about ten minutes, an intraday decline near 0.6%, and then maintained a downward momentum. During the U.S. stock market session, the yen underwent a second, even stronger surge, erasing all losses since Christmas last year. USD/JPY accelerated its decline to 155.63, hitting the lowest level since December 24 last year.
Japanese officials have not confirmed speculation about intervention. Japan’s chief foreign exchange official Junichi Mimura refused to comment on whether the yen was being intervened, while Finance Minister Takatsuki Katayama avoided the topic of intervention and only said they were paying close attention to exchange rate movements with a heightened sense of urgency, “remaining highly vigilant at all times.” These ambiguous statements have left the market in doubt regarding the reason for the volatility.
This yen rally comes as Japan faces political turmoil. According to CCTV News, on Friday the Katamichi Sanmo Cabinet passed a resolution to dissolve the House of Representatives. That afternoon, the Japanese House of Representatives officially announced its dissolution, marking the first time in 60 years that the House of Representatives was dissolved on the opening day of a regular session of the Diet. The election will be announced on January 27, with voting and counting to take place on February 8. The interval between official dissolution and the vote/count is 16 days, setting a postwar record for shortest duration.
Fed Inquiry Ignites Market Buzz
Some media have reported that Friday’s yen rally was fueled by traders betting that the Japanese government was about to directly intervene in the FX market to support the yen. Some reports quoted traders saying that the yen’s jump coincided with the New York Fed calling financial institutions to inquire about yen exchange rates. Wall Street viewed this as a sign the Fed was preparing to assist Japanese officials in direct market intervention. The New York Fed declined to comment.
Harvard economist Jason Furman, former Chairman of President Obama’s Council of Economic Advisers, commented:
“It seems neither the U.S. nor the Japanese government is satisfied with the valuation of the yen. Everyone is highly alert, waiting for any factor that could change the status quo.”
Karl Schamotta, Chief Market Strategist at Corpay, states:
“I haven’t heard confirmation of official (yen) buying, but if a duck looks like, walks like, and quacks like intervention, it most likely is. The dollar is broadly falling (against other currencies), and the yen’s recent rapid and significant moves suggest the Japanese government is intervening—or traders are preemptively pricing in action.”
Exchange Rate Checks Heighten Nerves
Reports say the yen's sudden rebound during European trading led traders to guess the Ministry of Finance might have conducted rate checking with banks, which is often a signal of pending intervention. Such rate checks are traditionally viewed as a government warning to traders, indicating they see excessive currency fluctuations and are ready to buy or sell in the FX market to affect the yen’s price. These typically occur when volatility rises and verbal intervention has failed to stem the moves.
Valentin Marinov, strategist at Crédit Agricole, states:
“This reaction shows that with the yen exchange rate so close to the so-called ‘red line’—the level where intervention has previously occurred—the market is like a scared bird. ‘It’s easy to imagine this might be the early stages of official intervention.’”
Marc Chandler, Chief Market Strategist at Bannockburn Capital Markets, said: “Given the lack of news, all I see is potential bearish sentiment and fear of intervention.” Erik Bregar, Foreign Exchange and Precious Metals Risk Management Director at Silver Gold Bull, notes: “It’s Friday evening before the weekend, and no one clearly knows what’s happening. I think this is why the moves feel even more jittery.”
Bipan Rai, Managing Director at BMO Capital Markets, says that speculation of New York Fed exchange rate checks fueled the yen’s rally. “Importantly, past rate checks haven’t always meant intervention was imminent, but the fact the New York Fed asked implies any potential USD/JPY intervention wouldn’t be unilateral.”
Level 160: Japan’s Intervention ‘Red Line’
The yen previously approached the key 160 level, which is roughly where Japanese authorities intervened four times in 2024. The Japanese government spent nearly $100 billion in 2024 buying yen to support its currency, with each intervention taking place around USD/JPY 160, setting a rough marker for possible future actions.
Earlier this month, Finance Minister Takatsuki Katayama and the country’s top currency official issued fresh warnings to speculators after the yen weakened. Japan’s last FX market intervention to support the currency was in 2024, when USD/JPY fell below 160. Brendan Fagan, Bloomberg Markets Live strategist, points out: “Psychological resistance seems to be forming again. Under pressures from fiscal uncertainty, rising yields, and continued capital outflows, the path for USD/JPY to rise is narrowing.”
But Harvard’s Furman believes rate checks—even actual intervention—“have not historically had lasting effects,” and that “real policy change is needed” for enduring results.
Since Sanae Takamichi became Japanese Prime Minister in October last year, the yen has remained under sustained pressure, falling more than 4% on fiscal concerns and hovering near levels that have triggered verbal warnings and intervention fears. Earlier this week, turmoil in the bond market highlighted investor anxiety over Japan's finances, as Takamichi announced an early February election and promised tax cuts, spiking Japanese government bond yields to all-time highs.
Fed Actions Send Key Signals
According to the New York Fed’s official website, since 1996 the Fed has only intervened in FX markets on three separate occasions, most recently after the 2011 Japanese earthquake, when the U.S. and seven other G7 countries jointly sold yen to help stabilize post-quake market trading in Japan.
Krishna Guha and other Evercore ISI economists comment:
“In current circumstances, U.S. intervention is reasonable and the joint goal is to prevent excessive yen weakness while also hoping to stabilize Japan’s bond market indirectly. Regardless, U.S. participation in FX intervention is reasonable—even if no action actually materializes, it might prompt yen short positions to unwind quickly.”
Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investment, says: “Market attention to the yen stems from this week’s volatility in Japan’s bond market. The U.S. Treasury may be nervous about the spillover from Japanese government bonds to U.S. Treasury markets, and is exploring currency intervention as a stabilizing tool. Whether this risk is substantive remains an open question.”
Leah Traub, portfolio manager at Lord Abbett & Co., notes: “Given past government concerns about currency intervention, if Japan really needs to intervene more forcefully, the U.S. seems ready to give the green light.”
BOJ YCC Return Would Weigh on Currency; Yen Gains Could Trigger U.S. Stock Selling
Early Friday, the Bank of Japan sent signals it is ready to keep raising what are still very low borrowing costs amid tense political atmosphere. The BOJ on Friday raised its growth outlook, maintained hawkish inflation forecasts, and held rates unchanged, indicating confidence that a moderate recovery would justify further—still modest—increases in borrowing costs.
BOJ Governor Kazuo Ueda hinted that overall inflation would soon weaken below 2%, but also left open the possibility of early rate hikes. He said:
“April is a month with relatively more price revisions. We are watching this with some interest. Although it’s not the most important factor in deciding the timing of rate hikes, it is one factor.”
However, Ueda expressed caution about market functions at a press conference, discomfort with the speed of long-term moves, and willingness to act if volatility becomes disorderly. He stated the central bank could operate flexibly to smooth bond market fluctuations when needed.
Rich Privorotsky, Head of Goldman Sachs Delta-One Trading, said technically, Friday’s BOJ actions should be seen as a “hawkish stance to maintain the status quo.” Financial blog Zerohedge argues Ueda did not formally restore Yield Curve Control (YCC), but kept a soft backstop in place, which caused the yen to be sold before Friday’s rally on speculation that YCC might return and weaken the currency sharply.
If the yen strengthens, it may trigger U.S. stock sell-offs. Société Générale points out that since the summer 2024 equity sell-off (yen carry trade unwinding), the yen’s exchange rate has shown a peculiar correlation with short-term U.S. stock market volatility.
The gray line in the chart below represents returns from buying ultra-short-term S&P 500 volatility. Since June 2025, this segment’s volatility performance has clearly lagged. From this perspective, if this correlation holds, yen trade-weighted strength might be an important trigger for broader risk-off sentiment in equities.
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