The Japanese yen has rebounded sharply! The market doubts official intervention, and the Japanese Finance Minister refuses to acknowledge it: "We are always keeping a close watch."

The Japanese financial market experienced a highly tense day on Friday, with the yen against the dollar fluctuating sharply shortly after the press conference held by Bank of Japan Governor Kazuo Ueda, first falling and then rising, leading to widespread speculation in the market about the authorities possibly conducting exchange rate checks or interventions. This volatility marked a suspenseful end to an already tense week.

After the press conference following the policy decision, the yen briefly depreciated to 159.23, then quickly reversed within minutes, rising to a high of 157.37, an increase of 0.7%, with a total fluctuation of over 1.2% throughout the day. This sudden reversal caught the market off guard, prompting traders to speculate on the reasons behind it.

In an interview after the press conference, when asked whether Japan would intervene in the market, Finance Minister Shunichi Suzuki refused to respond, only stating, "We are always keeping a sense of urgency and monitoring," leaving the market in the dark regarding the reasons for the volatility. The yen approaching the key level of 160 has made investors highly alert—this is roughly the level at which Japanese authorities intervened four times in 2024.

The heightened tension in the market stems from the yen's continued approach to sensitive levels. Valentin Marinov, a strategist at Crédit Agricole, stated:

"It is easy to conclude that we may be in the early stages of official intervention. The market reaction also shows how tense it is when the yen trades so close to the 'line in the sand'—the points where interventions have occurred in the past."

Kazuo Ueda Sends Mixed Signals

The Bank of Japan maintained its policy interest rate at 0.75% on Friday but raised its medium- to long-term inflation forecasts. According to a previous article by Wall Street Journal, Kazuo Ueda stated at the press conference, if the economic situation develops as expected, rates will continue to rise, and underlying inflation will continue to rise moderately, with a loose financial environment remaining after a rate hike in December.

He specifically mentioned that the price increase by companies in April—when Japan's new fiscal year begins—will be one of the factors considered by the policy committee when discussing potential rate hikes. This statement was interpreted by the market as slightly dovish, leading to a subsequent weakening of the yen.

In response to the recent rapid rise in long-term interest rates, Ueda stated that the Bank of Japan would flexibly conduct bond operations under special circumstances, potentially encouraging the formation of stable yields.

Fukuhiro Ezawa, head of Standard Chartered's Tokyo market, stated:

"Ueda's comments were initially interpreted as slightly dovish regarding rate hikes, and the dollar against the yen subsequently rose. The currency pair then fell back, prompting market speculation that this trend might reflect intervention or exchange rate checks."

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

The Japanese government spent nearly $100 billion in 2024 to purchase yen to support the currency. The exchange rate during the four interventions was around 160 yen per dollar, setting a rough marker for potential future actions Marinov from Crédit Agricole pointed out that the current market reaction shows that investors are on edge when yen trading approaches levels where interventions have occurred in the past.

Tominaga Takayuki, a FX trader at Central Tanshi in Tokyo, stated, "In addition to the possibility of a rate check, the yen's weakness after Ueda's press conference may have triggered pre-planned trades. While it is difficult to reverse the yen's downward trend, the cautious sentiment in the market has clearly intensified. If the exchange rate approaches 160, expectations for intervention may escalate next week."

Rate checks have traditionally been seen as a warning signal from authorities to traders, indicating that they believe exchange rate fluctuations are excessive. This usually occurs when volatility increases and verbal interventions fail to curb the trend. During a rate check, the Bank of Japan typically calls traders to inquire about the yen's quotes against another currency, which is a step before actual trading.

Sohei Takeuchi, a senior fund manager at Sumitomo Mitsui DS Asset Management, noted, "Once the exchange rate breaks 159, the vigilance of Japanese authorities may have increased," indicating the possibility of a rate check. He stated that if authorities not only conduct checks but also engage in actual purchasing interventions, the yen could strengthen further and maintain higher levels for a longer period.

Market Remains Tense This Week

The Japanese market has been tense this week. Prime Minister Kishi Sanae promised that if she and the ruling Liberal Democratic Party win the early election on February 8, they will suspend the 8% tax on purchases of food and non-alcoholic beverages for two years.

Earlier this week, the yield on Japan's 40-year government bonds hit a record high, with market concerns intensifying over the potential increase in the country's debt burden due to relaxed government spending—Japan's debt is the largest among developed economies. These concerns have also put pressure on the yen.

As of after Kitayama Satsuki's speech, the yen was trading around 157.97, recovering some of its losses. The market will continue to closely monitor the yen's movements next week and whether authorities will take further action as it approaches the critical 160 level