The Japanese yen is once again at the center of the currency market after starring a sudden strengthening movement in just two sessions. After approaching the 160 yen per dollar area last week, the USD/JPY cross has fallen sharply towards the environment of 154–155a turn that has surprised by its intensity and by its clearly political, rather than economic, origin.
What is relevant is not only the magnitude of the movement, but the reason. The yen has not strengthened because its fundamentals have suddenly changed. The market has reacted to the growing possibility of direct interventioneven coordinated between Japan and the United Statesto curb excessive weakness of the Japanese currency.
WHAT HAS HAPPENED?
The trigger came on Friday, when it emerged that the Federal Reserve Bank of New York had contacted financial entities to ask about their positions in USD/JPY. These types of movements, known as ‘rate checks’, are usually interpreted as a prior signal to a possible intervention in the currency market. Although no action has been officially confirmed, the gesture has been enough to change the behavior of investors.
The yen is no longer just a cheap currency to finance global bets, but an instrument under political surveillance
From MUFG they explain that this episode reinforced a general sale of dollars and accelerated the rebound of the yen. The bank emphasizes that a joint intervention between Japan and the United States is not its base scenario, but recognizes that Just the possibility of Washington being involved has an enormous psychological impact about the market. The yen is used as the financing currency of the ‘carry trade’: Investors borrowed in yen—cheap—to invest in assets with higher returns in other currencies. That ‘passive’ role is the one that is now in question. As strategist Stephen Innes summarizes, the yen isn’t pricing interest rates, it’s pricing authority. That is, the market is not reacting to macroeconomic data, but to the perception that the authorities are willing to act. When a currency goes from being ignored to being watched by governments, investor behavior changes immediately. However, the political factor is double. On the one hand, the Japanese Government has raised its tone regarding the «speculative and disorderly» movements of the yen, aware that a weak currency fuels imported inflation and exacerbates the cost of livingespecially in food and energy. On the other hand, there is concern in Washington that an excessively weak yen will neutralize the effect of US tariffs.by artificially improving the competitiveness of Japanese exporters. Furthermore, a prolonged decline in the yen pushes up Japanese debt yieldswhat can end affecting the US bond market through flows and coverage, especially sensitive terrain for the White House.
IMPACT ON THE STOCK MARKET AND BONDS
The movement of the yen has not been limited to the currency market, it has also been noted in the Nikkei, with falls close to 2% this Monday. From Hargreaves Lansdown, its principal investment analyst, Kate Marshall, warns that, beyond the immediate effect, the implications may be more complex if the strength of the yen continues. «If the appreciation of the yen proves persistent, it could increase volatility by favor the dismantling of highly consolidated ‘carry trades'»he points out, adding that a significant repatriation of capital to Japan would represent a change in global flows and could generate short-term pressure on other equity markets, including the US. However, he clarifies that greater currency stability does not have to be negative for the Japanese stock market in the long term, as it favors a more sustainable profit base. The focus has also shifted to debt marketas mentioned above. Hal Cook, senior investment analyst at Hargreaves Lansdown, highlights that recent volatility has been concentrated in the long stretches of the curve. «The yield on the 40-year Japanese bond exceeded 4% last week. It is low compared to other countries, but for Japan it is something unprecedented: it is literally the highest level ever recorded,» he explains. Cook attributes this move to a combination of higher long-term inflation expectations and the Investor concerns over Japanese PM’s tax plansperceived as a strategy to «lower taxes and increase spending.» In this context, remember that the Bank of Japan made it clear on Friday that would intervene if necessary to support the bond marketwhich has helped to temporarily calm investors and moderate returns. However, he warns that all eyes are now on the early elections of February 8, with the expectation that volatility will continue.
PRUDENCE FOR THE COMING MONTHS
Despite the recent bounce in the yen, analysts call for caution. Rabobank and ING recall that real rates in Japan remain negative and that fiscal doubts have not disappeared. Intervention can stop extreme movements, but only a clearly more restrictive Bank of Japan would provide lasting support to a stronger yen. In this sense, Governor Kazuo Ueda has begun to send somewhat tougher signals, although the market believes that they will not be enough on their own if other G10 central banks also tighten their policy this year. The conclusion is clear: the yen has changed state. It is no longer just a cheap currency to finance global bets, but an instrument under political surveillance. That doesn’t guarantee a sustained bullish trend, but it does explain why the market has reacted so quickly. As long as deliberate ambiguity persists over whether there will be intervention, investors will continue to exercise caution.
