Investors increasingly see official intervention in the market as the only near-term lever to stem the yen's slide, as central banks delay adjusting interest rates and Middle East tensions push oil prices higher.
The Japanese currency extended losses Thursday after touching its weakest level since mid-2024 in the wake of the Federal Reserve's policy meeting. The move lower during Asia hours followed a report that US President Donald Trump is set to receive a briefing on new military options for Iran.
It slid as far as 160.72 against the dollar, bringing it closer to the key level of 161.95 that marked its weakest point in 2024, when Japan last intervened in the market. Japanese government bonds also slumped Thursday, pushing yields higher, which is likely to add to the concerns of officials in Tokyo.
The wide interest rate gap between the US and Japan, which undermines the yen, has little prospect of narrowing in the near term. Rather than moving toward a possible rate cut, the Federal Reserve held rates steady and looks more divided now on its outlook, while Bank of Japan Governor Kazuo Ueda signaled he needs more time to assess the impact of geopolitical risks before deciding on the timing of further hikes.
"Ueda has not explicitly stated whether there will be a rate hike in June, and if a rate hike is not possible, intervention is the only way to halt the yen's decline," said Shota Ryu, an FX strategist at Mitsubishi UFJ Morgan Stanley Securities.
Timing is also key. The upcoming Golden Week holidays in Japan create a period of thinner liquidity, which has historically provided a window for intervention, as seen in 2024. That is keeping traders on heightened alert for potential government action.
Earlier this week, Minister of Finance Satsuki Katayama said authorities are standing by around the clock to respond to foreign-exchange moves as needed and are on high alert for speculative moves.
"We continue to see a meaningful chance that intervention will be conducted before USD/JPY reaches its cycle high of 162," said Junya Tanase, chief Japan FX strategist at JPMorgan Chase & Co. Gains in the pair driven by higher oil prices "could also be viewed as speculative, potentially providing justification for intervention."
Still, doubts persist about how effective an intervention would be. The dollar's strength and higher oil prices mean intervention may do little to reverse the yen's depreciation trend.
Positioning also suggests a more limited impact. While leveraged funds have increased short yen bets, they remain below the extremes seen in 2024 when intervention helped stabilize the currency.
"The likely sequence would be a rate check followed by actual intervention," according to Keiichi Iguchi, a senior strategist at Resona Holdings. "Even if intervention does occur, the impact would likely be limited to a temporary 4-5 yen appreciation. Given the underlying fundamentals favoring a stronger dollar and weaker yen, the currency would likely return to previous levels relatively quickly."