Japanese Prime Minister Masayoshi Takachi issued a warning on Monday regarding recent severe market volatility, pledging to monitor speculative movements and take action if necessary. This marks a clear signal against market speculation, following her statement over the weekend that she would take "all necessary measures" to address abnormal fluctuations.

On the 26th, when discussing market trends, Takachi stated that various factors are behind the market volatility, but she emphasized that speculative moves would be monitored and action taken if needed. She revealed that Japan's primary budget balance has reached a surplus for the first time in 28 years. She indicated she would focus on fiscal sustainability.

Takachi also stated:

“If the ruling coalition cannot secure a majority of seats, I will not serve as Prime Minister.”

Driven by the news, the yen extended its gains, with the USD/JPY falling over 1% to currently trade at 154.01. As previously noted, the market experienced severe turbulence last Friday, with the USD/JPY rate plunging approximately 1.75% at one point, marking the yen's largest single-day gain in five months. Market speculation widely suggests the catalyst for this reversal stemmed from the New York Fed's highly unusual "rate check" action.

Takachi Warns of Crackdown on Market Speculation Although Takachi commented that, as Prime Minister, it was inappropriate for her to comment on "matters that should be determined by the market," Finance Minister Satsuki Katayama had already clarified that Japan has the "discretion" to act if necessary, including market intervention. Reports citing trader accounts indicated that the Federal Reserve Bank of New York had contacted financial institutions to inquire about the yen's exchange rate. Coupled with recent close communication between Finance Minister Katayama and US Treasury Secretary Besant, this suggests the possibility of joint intervention is increasing. Masahiko Loo, Senior Fixed Income Strategist at State Street Global Advisors, said:

"Historically, a rate check by the Ministry of Finance is a precursor to action. Failure to follow through would fuel speculative pressure."

Shoki Omori, Chief Strategist at Mizuho Securities, pointed out that coordinated policy warnings for the foreign exchange and bond markets indicate that "authorities are not defending a specific level, but are signaling that disorderly, speculative, or excessively rapid moves could trigger a non-linear response," which significantly reduces the appeal of one-way bets. State Street's Loo stated: "This is shaping up to be a controlled, policy-driven reset." He added that without follow-up action, markets would test official resolve, further pressuring the yen and thereby fueling speculative pressure. Joint Intervention Evokes Memories of Plaza Accord For some traders, the actions by Japan and the US are reminiscent of the 1985 Plaza Accord – an agreement among several major global economies that effectively devalued the US dollar. Discussions about a policy response to address economic imbalances caused by "sustained dollar overvaluation" began over a year ago. Anthony Doyle, Chief Investment Strategist at Pinnacle Investment Management, said:

"Japan cannot fix its yen problem without incurring domestic pressure or global spillover risks, so the idea of coordinated action, a Plaza Accord 2.0, suddenly doesn't seem crazy to some. When the US Treasury starts making calls, it usually means this has moved beyond a normal FX story."

According to the New York Fed's website, the US has intervened in the foreign exchange market on only three separate occasions since 1996, most recently in 2011 alongside other G7 members selling yen to stabilize trading after the Japan earthquake. Homin Lee, Senior Macro Strategist at Lombard Odier, said: "Ultimately, if this is a genuine attempt to stabilize USD/JPY, Tokyo needs to take actual intervention action." He added that intervention by both Japan and the US would be "an unusually public display of bilateral coordination." Short Positions Face Squeeze Yen short positions have increased to their highest level in over a decade, and the current rebound could trigger substantial unwinding. The volatility in the forex market accompanies severe turbulence in the Japanese Government Bond (JGB) market, where long-term bond yields surged to record highs early last week before retreating. Japan's benchmark 10-year government bonds extended their recovery on Monday, with the yield falling 3 basis points to 2.225%. The government will auction 40-year bonds on Wednesday, a sale expected to be closely watched as yields for that tenor breached the key 4% level last week.

According to Bloomberg strategists, aided by the yen's strength, this week's 40-year bond auction appears set to proceed smoothly, which would be a significant relief for the global G10 fixed income market. Less than a week ago, Japan's ultra-long bond issuance seemed like an unbearable burden for global debt markets. Market Turmoil Intensifies Ahead of Election These latest developments come as Japan prepares for a snap election on February 8th. Regarding tax policy, Takachi expressed her desire to submit a bill to suspend the food tax in fiscal year 2026, aiming to implement a reduction in the food consumption tax that year. She personally hopes to see the food consumption tax reduced as soon as possible and stated she would continue to support businesses in achieving wage growth. The Japanese government spent nearly $100 billion in 2024 purchasing yen to support the currency. In four interventions, the yen's exchange rate was around 160 per US dollar each time, setting a rough marker for potential further action. The 40-year bond yield surged to a new high since its issuance, reaching the highest level for any tenor of the country's sovereign bonds in over thirty years. The yen's sharp rise also pressured the US dollar, subsequently helping to boost some emerging market currencies like the Korean won and the Singapore dollar.