Is yen intervention on the cards?

The yen's historic plunge: Implications and potential interventions

The Japanese yen (JPY) has fallen to its weakest level since 1986, reaching ¥160.39 per dollar and sparking speculation about potential government intervention. This 12% depreciation in 2024 has raised concerns about economic impacts in Japan, particularly regarding higher import prices affecting consumers and businesses.

The primary driver behind this weakness is the significant interest rate gap between Japan, where rates remain near zero, and the United States, where rates have risen to their highest level since 2008, at 5.25%.

Japanese officials on high alert

In response to the yen's decline, Japanese officials have been closely monitoring the situation and issuing verbal warnings. Finance Minister Shunichi Suzuki and top currency official Masato Kanda have both indicated readiness to take action if necessary. Analysts speculate that intervention may occur if the yen reaches 165 per dollar, with Japan possessing substantial financial resources estimated at $200-300 billion for potential market operations.

International scrutiny and upcoming economic indicators The yen's situation has drawn international attention, with the U.S. Treasury recently adding Japan to its "monitoring list" for foreign-exchange practices. While stopping short of labelling Japan a currency manipulator, this move highlights the global implications of the yen's movements. Market participants are now closely watching upcoming U.S. inflation data, which could influence the yen's trajectory and the broader economic landscape.

Factors influencing intervention timing

Despite the yen's weakness, some factors may delay immediate intervention. Current low market volatility makes it challenging for authorities to justify entering the market. Additionally, the approaching quarter-end and potential dollar demand are considerations. Analysts suggest that Japanese officials might wait for volatility to increase before taking action, balancing the need for intervention with market conditions and international perceptions.

USD/JPY chart – technical analysis

Price Action and Trendlines: The chart shows a strong uptrend in price movement, evidenced by a series of higher highs and higher lows. This uptrend started after a significant dip around mid-December. The price has steadily climbed, indicating bullish momentum. The price is currently well above the key support levels, suggesting a strong bullish sentiment.

The price has consistently stayed above key moving averages, with each one trending upwards. This indicates sustained buying interest and strong bullish sentiment in the market. The moving average convergence/divergence (MACD) and the stochastic momentum index (SMI) indicators also support this bullish outlook, with the MACD in positive territory and the SMI showing strong momentum.

Key Points to Watch:

Price Action: Continue to monitor the price action around the current levels. A pullback could find support at the 50-day simple moving average (SMA) or the nearest support levels around 15,194.6 and 15,016.0.

USD/JPY chart