Japan and possibly the US are ready to intervene to prop up a plunging yen.
 

In the above currency pair, up is weakening. $1 now buys 155 .71 yen.

Takaichi Warns Japan Is Ready to Act on Speculative Moves

Bloomberg reports Takaichi Warns Japan Is Ready to Act on Speculative Moves

Japanese Prime Minister Sanae Takaichi sent a fresh warning to financial markets amid a weakening yen and surging bond yields, saying the government will be ready to take action.

“It is not for me as a prime minister to comment on matters that should be determined by the market, but we will take all necessary measures to address speculative and highly abnormal movements,” she said during a television debate among party leaders on Sunday.

[Translation: I pay lip service to free markets]

Takaichi didn’t specify if her comments were related to Japanese government bond yields or the yen. Government officials have recently made several warning comments regarding both markets.

Speculation has mounted that Japanese authorities may be preparing to enter foreign-exchange markets in a bid to halt the yen’s slide, possibly with the rare assistance of the US. It weakened to as much as 159.23 to the dollar on Friday before swinging sharply.

The currency reversed declines after Bank of Japan Governor Kazuo Ueda ended his post-policy decision press conference. Later in the day, top currency official Atsushi Mimura declined to comment on whether the government stepped in to support the yen and whether a rate check was conducted.

Friday’s yen rally reversed what had been a slide toward levels last seen in 2024, when Japan stepped in to buy its currency. 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.

The government spent almost $100 billion on yen-buying to prop up the currency in 2024. On each of the four occasions the exchange rate was around 160 yen per dollar, setting that level as a rough marker for where action might take place again.

Japan is gearing up a for a snap election on Feb. 8, with Takaichi’s promise to cut taxes on food sending shockwaves through the Japanese debt market in the past week. Yields on bonds with the longest maturities surged to records earlier in the week before retreating.

Will the US Intervene?

Also consider Speculation Mounts Japan to Buy Yen, Perhaps With US Help

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 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.

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.”

USDJPY Currency Pair Long-Term Chart
 

Japan seems desperate to hold this long-term resistance dating to December 1989.

Next long-term resistance is not until 250. Yikes!

Japan Bond Crash

Please note Japan Bond Crash Unleashes a $7 Trillion Risk for Global Markets

In the Japanese government bond market of old, it would take weeks — sometimes months — for yields to eke out, tick by tick, a move of that magnitude. For most of the 21st century, the JGB market was so steady — and interest rates were stuck at such rock-bottom levels — that Tokyo was viewed by investors around the world as a source of both cheap funding and of stability during times of global turmoil.

Last week’s selloff, accompanied by dramatic swings in the yen, made clear those days are over. Inflation, long dormant in Japan, has taken hold and, moreover, Prime Minister Sanae Takaichi is pushing fiscal stimulus plans that would swell a government debt pile that is already uncomfortably large. As a result, investors have been frantically sending bond yields up to levels once unthinkable — more than 4% on the longest-dated JGBs. That’s exerting upward pressure on interest rates from the US to Britain and Germany.

Traders are braced for more disorderly market swings as Japan hurtles toward a Feb. 8 snap election for which both Takaichi and her rivals have campaigned on looser budgets. 

An even bigger worry for global markets over the long term is that the new normal of higher Japanese yields will prompt domestic investors to bring much more of their money back home. Some $5 trillion of the country’s capital is deployed overseas, and that’s even before accounting for the yen that foreign funds have borrowed for their wagers in financial assets around the world.

“It’s a new era,” said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management, one of the nation’s biggest. “I don’t think Japan’s yields have gone far enough yet. This is just the beginning — there’s a chance that bigger shocks will happen.”

T. Rowe Price’s Arif Husain describes Japan’s rising rates as a financial San Andreas fault-line, with each tremor leading to feverish speculation over when the big one will come. The selloffs in the $7.3 trillion JGB market have been getting wilder and more frequent since the Bank of Japan ended its experiment with negative interest rates in March 2024, with nine occasions where losses were over two standard deviations worse than the average over the period.

Even by those standards, Tuesday’s selloff stood out. The plummet in ultra-long debt wiped out $41 billion across the Japanese yield curve after Takaichi called the election to strengthen her grip on power and ensure support for her agenda of high spending and tax relief. The 40-year bond yield burst above 4% to a record, while 30-year yields surged more than a quarter of a percentage point — eight times the average daily trading range in the past five years.

“If the yen slides hard, Japan has to defend it, and the fastest lever is selling reserves, including Treasuries,” said Anthony Doyle, chief investment strategist at Pinnacle Investment Management. “That’s how a Japan problem turns into higher US yields at exactly the wrong moment.”

Amid the trouble in markets, discontent over the cost of living continued to grow, leading to the downfall of then Prime Minister Shigeru Ishiba. Following two decades marked by lengthy periods of falling prices, core inflation rose 3.1% in 2025, the fourth year in which the gains exceeded the BOJ’s 2% inflation target.

“The danger is that Japan was a market that never moved and now you’re dealing with a level of volatility that is remarkable,” said Ugo Lancioni, a fund manager at Neuberger Berman. “Eventually the market will find an equilibrium rate but it looks like we are not there yet.

“Japan has got itself into a really vulnerable position,” said Marlborough Investment’s Athey. “If authorities simply ignore these moves, then the market could get really dysfunctional, and they will then have to respond to a much worse situation.”

But let me point out one thing …

Currency Interventions Never Work

This is all the more amusing because in 2016, Japan intervened to weaken the yen.

Nonetheless, the yen strengthened form 116 to 103 vs the US dollar in September of 2020,

I commented on April 8, 2016 Another Idiotic Forex Intervention Proposal: “Beat the market to a pulp and make it concede”

Currency intervention schemes do not work. Period. Any temporary results are bottled up to explode later (Switzerland), or simply proceed on their merry way with perhaps a slight delay like we have seen in Japan, Brazil and other places, countless times.

Nonetheless, people propose all sorts of preposterous “mind over market” Forex schemes they believe will work.

Don’t Be Gentle

MarketWatch says Japan Can’t be Gentle with Yen Intervention.

While speaking to a group of journalists, Finance Minister Taro Aso said the dollar-yen trade had become “one-sided.” The utterance of that phrase by certain Japanese officials has often preceded past interventions.

So if the BOJ does decide to intervene by selling yen, how might it go about this sometimes-controversial act?

Ultimately, the goal of any intervention would be to squeeze “the late shorts” out of the market, said Boris Schlossberg, managing director of currency strategy at BK Asset Management.

For any BOJ action to have market traction beyond a short-term response, “they need to beat the market to a pulp and make it concede,” Schlossberg said.

“Make the Market Concede”

Yeah right. After all the shorts are driven out, who is left to buy?

Driving out shorts or longs does not change the fundamentals.

If you want to fix the “problem”, you have to change the fundamentals. Change the fundamentals and sentiment will eventually follow. Attempts to forcibly change sentiment will tend to strengthen it.

The underlying irony in this discussion is the inane belief that a strong currency is a problem.

Lessons Not Learned – No Failure Too Great to Admit It

Let’s step back a bit further.

Please consider my October 7, 2010 post Lessons Not Learned

Tokyo has recently made several major moves to bolster its economy. Earlier this week Japan’s central bank cut its key interest rate to virtually zero, and last month it intervened in currency markets to weaken the yen.

Except in the short-term I have yet to see any of these intervention measures stick.

Japan Throws in the Towel?

Japan’s finance minister has all but thrown in the towel on large-scale interventions, at least if you believe what he is saying. Please consider Noda Signals Japan to Avoid Return to Large-Scale Intervention

Japan’s finance minister signaled that while his government is ready to sell yen in market if needed, the country doesn’t intend to return to the long-term, large scale intervention campaigns of the past.

“The intervention we conducted on Sept. 15 was to rein in excessive movements,” Yoshihiko Noda told reporters today in Tokyo before departing for a Washington meeting of Group of Seven finance authorities. “It has a different character from one seeking a certain level with large scale, long-term intervention.”

Japan conducted the intervention to “rein in excessive movements”. The results are shown above. I fail to see Japan accomplished anything.

Given that interventions don’t work, It’s a good thing Japan “doesn’t intend to return to the long-term, large scale intervention campaigns of the past.”

Fast Forward to 2026

Something changed in 2020. Japan got its wish. The yen has weakened dramatically from 105 to 154. That’s a 31.8 percent decline.

You would think that after trying to trash the yen for a decade, that Japan would be pleased by this. But No! Japan got its wish and is now unhappy with that wish. Go figure.

“It is not for me as a prime minister to comment on matters that should be determined by the market, but we will take all necessary measures to address speculative and highly abnormal movements,” she said during a television debate among party leaders on Sunday.

Thanks, I’ll make a note.

By the way, Trump wants a weaker US dollar. I think he is going to get his wish. No intervention will be necessary.

And when inflation escalates (unless there is a bone crushing recession first), Trump will blame Biden, Canada, and Japan in that order.

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