Speculation Mounts Japan to Buy Yen, Perhaps With US Help

(Bloomberg) — Speculation mounted into the weekend that Japanese authorities could be preparing to enter currency markets in a bid to halt the yen’s slide, possibly with the rare assistance of the US.

The yen rallied as much as 1.75% to 155.63 per dollar on Friday, extending the gains seen during the Asian trading day to its strongest level of the year. The move was the biggest one-day surge since August and reversed what had been a slide toward levels last seen in 2024, when Japan stepped in to buy its currency.

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The jump in the US session came as traders reported that the Federal Reserve Bank of New York had contacted financial institutions to ask about the yen’s exchange rate. Wall Street saw those inquiries as a potentially laying the ground for Japan to intervene to prop up the yen, perhaps even with the US government joining in.

“Neither US authorities or Japanese authorities seem happy about the value of the yen right now,” said Harvard economics professor Jason Furman, who served as chairman of the Council of Economic Advisers under former President Barack Obama. “Everyone is on hair trigger for something that will change it.”

Representatives for the New York Fed declined to comment. US Treasury representatives didn’t immediately respond to request for comment. When it comes to exchange rates the Fed traditionally takes its direction from the US Treasury.

Japan’s finance minister, Satsuki Katayama, and the country’s top currency official recently issued fresh warnings to speculators after the yen weakened. The 2024 intervention, which took place when the yen pushed over the 160-per-dollar level, was preceded by rate checks.

Such checks have often served as a warning to traders that authorities view the yen’s trading as excessive and are ready to buy or sell in markets themselves to influence the price of it. They usually happen when volatility has increased and verbal comments have failed to rein it in.

Volatile Moves

The rapid trading in the yen follows a week of turmoil in the Japanese government bond markets heading into the Bank of Japan’s January policy meeting, at which officials held benchmark borrowing costs steady. The yield on Japan’s 40-year bond rose to its highest mark since its debut earlier this week, prompted by fears of steep government spending under Prime Minister Sanae Takaichi and rising inflation.

In a sign of US concern, US Treasury Secretary Scott Bessent said this week he had spoken with Katayama about the selloff in Japanese debt, adding it had affected the Treasuries market. The Trump administration has previously signaled a desire to contain long-term US borrowing costs.

“Market focus on the yen stems from volatility in Japan’s bond market earlier this week,” said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investment. “It is possible that the US Treasury is nervous about spillovers from JGBs to the Treasuries market and is studying currency intervention as a stabilization tool. Whether this risk is material is an open question.”

But rate checks — and even actual intervention — “have historically not had persistent effects,” said Harvard’s Furman. There would need to be “a real policy change for that.”

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A “psychological barrier appears to be forming again. With pressure coming from fiscal uncertainty, rising yields and persistent capital outflows, the path higher for USD/JPY will get ever narrower.”

— Brendan Fagan, Markets Live Strategist.

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In September, finance officials from the US and Japan reaffirmed in a joint statement their basic commitment to let markets determine currency exchange rates and not to target them for a competitive advantage. They left scope, however, for intervention in certain circumstances in line with previous statements, saying that it should be reserved for dealing with excess volatility or disorderly movements in the currency market.

“Given past concerns by the administration about currency intervention, the US seems to be giving Japan the green light if it does need to intervene more forcefully,” said Leah Traub, a portfolio manager at Lord Abbett & Co.

At BMO Capital Markets, managing director Bipan Rai said the speculation that the New York Fed had conducted a rate-check on the yen drove the currency higher.

“It’s also important to note that rate checks in the past haven’t necessarily meant that intervention was imminent,” Rai said. “But the fact that the NY Fed was asking implies that any potential intervention in dollar-yen won’t be unilateral.”

The US has only intervened in currency markets on three separate occasions since 1996, according to the New York Fed’s website, most recently selling the yen alongside other Group-of-Seven nations to help stabilize trading after the 2011 earthquake in Japan.

“It is plausible that the US would intervene in current circumstances with the shared goal of preventing excessive weakness in the Yen while also hoping to indirectly contribute to stabilizing Japan’s bond market,” according to Evercore ISI economists including Krishna Guha. “In any event, the fact that US involvement in FX intervention is plausible could speed a sudden unwind of yen shorts even if no such US intervention actually materialized.”

–With assistance from Miles J. Herszenhorn, Anya Andrianova, George Lei, Ye Xie, Mia Glass, Takahiko Hyuga and Maria Eloisa Capurro.