Growing Yen Intervention Risks

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The Dollar-Yen exchange rate has pulled back amidst a broader easing in the U.S. Dollar and increased talk of intervention in the FX markets by Japanese authorities.

"Verbal intervention from Japanese policymakers has helped to temporarily provide support for the yen," says Lee Hardman, Senior Currency Analyst for Global Markets Research EMEA at MUFG Bank.

USD/JPY peaked at 153.18 midweek but has since settled lower at 151.98. The pair is still nearly 9% higher than its September lows and authorities appear increasingly concerned by the sudden depreciation in the Yen.

"Recent moves in foreign exchange rates were discussed at a bilateral meeting between Finance Minister Kato and U.S. Treasury Secretary Yellen," said Atsushi Mimura, Japan's top currency diplomat.

He said Yellen and Kato confirmed they would continue to communicate closely.

"Our view is that that there are clearly one-sided and rapid moves, and we are closely watching currency moves including speculative trading with a stronger sense of urgency," said Mimura.

According to MUFG's Hardman, the comments send a clear warning signal to market participants that Japan is prepared to intervene again to support the yen if it continues to weaken like it has so far this month.

However, MUFG thinks intervention is unlikely until after the U.S. election has taken place.

The election, he explains, is considered an event that will be pivotal for the performance of USD/JPY and the US dollar more broadly.

"While a Trump victory and Red Sweep could see USD/JPY moving back closer to year to date highs, a divided Congress with Trump or Harris as President could see USD/JPY giving back some its recent strong gains by limiting room for fiscal policy easing and helping to ease upward pressure on US yields," says Hardman.