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(Bloomberg) -- Yen traders are on watch for signs of further action by Japanese authorities after intervention triggered the currency’s sharpest rally in three years on Thursday.
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Japan likely spent around ¥5.4 trillion, or roughly $34.5 billion, in foreign-exchange markets to prop up the yen, according to a Bloomberg analysis of central bank accounts.
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The yen was steady at around 156.80 per dollar in New York on Friday, after a roughly 2% surge on Thursday that pulled it back from close to its weakest levels in four decades.
While the nation’s top currency official has declined to confirm intervention, a person familiar with the matter said authorities had entered the market for the first time since 2024. Economic officials in the US were notified before the move, according to another person familiar with the matter.
Without additional action, the yen’s intervention-fueled rally is in danger of evaporating, according to traders, who see an increasing likelihood that Japan will have to enter the market again. Although a weaker currency helps Japan’s exports, it also risks faster inflation by making imports — including soaring oil — pricier.
“The chances are they will need to continue to act to support the yen in the longer-term,” said Kathleen Brooks, research director at XTB. “There is a history of failed intervention attempts to support the yen, which suggests that the gains may not last and the dollar could make a comeback.”
An erosion of initial gains in the yen would follow the pattern seen around this time in 2024, when Japan came into the market on several occasions to address weakness. Atsushi Mimura, vice finance minister for international affairs, offered a veiled warning of this to traders on Friday ahead of the May 4-6 Golden Week break in Japan.
“I will not comment on future developments, but I will point out that we are just at the beginning of a long holiday period,” Mimura said. “We are in extremely close contact with the US, and I believe we share our assessments of the situation and our actions.”
Mimura extended his warning to energy traders, adding that, “generally speaking, we are always ready to act regarding crude oil futures transactions.”
Tensions in the Middle East and surging oil prices are also hurting the yen given Japan’s heavy reliance on fuel from the region.
Citigroup Inc. strategists recommended that clients take profit on long yen position versus the dollar, opened in April, given that elevated oil prices may pressure the currency.
Japanese authorities spent a total of around $100 billion in buying yen several times in 2024 after the currency tumbled to around 160.17. Additional steps were taken on days when the yen reached 157.99, 161.76 and 159.45.
This time around, the amount they likely spent was “well insufficient to limit the upside in dollar-yen, let alone push the market lower,” said Neil Jones, managing director of currency sales and trading at TJM Europe. “A further $100 billion of dollar sales versus yen should be sufficient to turn the tide.”
CME Group saw a surge in activity in yen futures following the intervention, with trading in JPY/USD futures exceeding 632,000 contracts on Thursday worth some $50.8 billion — a record, according to a company spokesperson. The volume of spot yen traded via CME’s EBS platform was the most in a decade.
“The price action reinforces the view that 160 is the line in the sand for Japan’s Ministry of Finance,” said Carol Kong, a strategist at Commonwealth Bank of Australia. “But given the risk of a re-escalation in the Iran war and the Bank of Japan’s non-committal stance on rate hikes, USD/JPY looks set to recover soon, which means yesterday’s intervention might just be the first round.”
While officials have consistently said they are targeting excessive volatility rather than specific levels, Thursday’s intervention didn’t follow an abrupt bout of weakness. But with the Federal Reserve looking less dovish and the Bank of Japan showing reluctance to commit to a June rate hike, the yen looked set for further weakness. The latest move by Japanese authorities suggests growing discomfort with its prolonged weakness.
Before its sudden rebound, the yen had weakened beyond 160 per dollar in the wake of decisions this week by the BOJ and the Fed to hold rates steady. The US rate advantage over Japan’s benchmark has contributed to the greenback’s strength against the yen.
Official data from the Ministry of Finance won’t be available until the end of the month, as settlement for Thursday’s action would fall on May 7 after the holiday.
Even if further intervention follows, its impact may be limited, said Neil Newman, head of strategy at Astris Advisory Japan.
“Intervention has never been a long-term solution,” he said. “The long-term fix is to narrow the interest-rate differential between the USD and JPY through rate rises from BOJ and rate cuts from the Fed, and effectively kill off the carry trade.”
--With assistance from Momoka Yokoyama, Takashi Umekawa, Gregory Turk and Ye Xie.
(Updates prices, CME details and Citigroup trade recommendation.)
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