This Friday, the Japanese yen staged a dramatic rebound after three consecutive days of decline, experiencing two distinct waves of appreciation during the session. The USD/JPY pair recorded an intraday maximum drop of approximately 1.75%, marking the yen's largest single-day gain since last August. This sudden and sharp movement has ignited widespread market speculation that the Japanese government may be intervening in the currency market, potentially even in a coordinated action with the United States government.

The yen's first wave of appreciation occurred during the early European trading session. The USD/JPY pair had initially climbed to 159.23, breaking above the 159.00 level for the first time since January 14, before abruptly reversing course and plunging into negative territory. Within roughly ten minutes, it rapidly fell below 157.50, representing an intraday decline of nearly 0.6%, and maintained its downward trajectory thereafter. During the U.S. stock market's afternoon session, the yen experienced a second, more forceful surge, erasing all losses accrued since last Christmas. The USD/JPY pair accelerated its decline to 155.63, hitting its lowest level since December 24 of last year.

Japanese officials did not confirm the intervention speculation. Masashi Mihara, Japan's top currency official, declined to comment on whether intervention had occurred to support the yen. Finance Minister Tsuyoshi Katayama avoided directly addressing intervention, stating only that he was monitoring currency market movements with a "high sense of urgency" and was "constantly watching with a sense of urgency." These ambiguous statements have cast a veil of uncertainty over the true cause of the volatility. The yen's significant appreciation coincides with a period of political turbulence in Japan. According to CCTV News, the cabinet of Prime Minister Takaichi Sanae passed a resolution for the dissolution of the House of Representatives on Friday, the 23rd. That afternoon, Japan's House of Representatives was formally dissolved, marking the first time in 60 years that the lower house has been dissolved on the opening day of a regular Diet session. The official announcement for the House of Representatives election will be made on January 27, with voting and ballot counting scheduled for February 8. The 16-day interval between the formal dissolution and the vote is the shortest in Japan's post-war history.

Fed Rate Inquiries Spark Market Discussion

Some media outlets pointed out that Friday's yen strength stemmed from traders betting on imminent direct intervention by the Japanese government to bolster the currency. Reports cited some traders noting that the yen's jump coincided with the New York Federal Reserve contacting financial institutions to inquire about yen exchange rates. Wall Street interpreted this as a sign that the Fed might be preparing to assist Japanese officials in direct intervention to support the yen. A representative for the New York Fed declined to comment. Jason Furman, a Harvard University economics professor who chaired the White House Council of Economic Advisers under President Barack Obama, commented:

"Both the U.S. and Japanese governments seem dissatisfied with the yen's value. Everyone is on high alert, waiting for any factor that might change the status quo."

Karl Schamotta, Chief Market Strategist at Corpay, stated:

"I haven't heard confirmation of official buying [of yen] yet, but if a duck looks, walks, and quacks like an intervention, it probably is an intervention. The U.S. dollar is falling broadly [against other currencies], and the yen's movement over the past few hours has been exceptionally rapid and pronounced, suggesting the Japanese government is stepping in—or traders are front-running an anticipated action."

Rate Checks Signal Heightened Nerves

Reports indicated that the yen's sudden reversal and surge during European stock trading on Friday led traders to speculate that Japan's Ministry of Finance might have conducted rate checks with banks. Such rate checks are typically a signal of preparation for intervention. This move has historically been seen as a warning signal from the government to traders, indicating they view currency movements as excessive and are prepared to buy or sell in the forex market to influence the yen's price. They usually occur when volatility increases and verbal interventions fail to curb the trend. Valentin Marinov, a strategist at Credit Agricole, said:

"This reaction shows that when the yen exchange rate gets so close to the so-called 'red line'—the level where intervention has occurred in the past—the market is like a startled bird. It's easy to think that perhaps we are currently in the early stages of official intervention."

Marc Chandler, Chief Market Strategist at Bannockburn Capital Markets, said: "Given the lack of news, the only thing I can see is this potential bearish sentiment and fear of intervention." Erik Bregar, Director of FX & Precious Metals Risk Management at Silver Gold Bull, noted: "It's the eve of the weekend, and no one has a firm grasp on what's happening. I think that's what makes the move even more anxiety-inducing." Bipan Rai, Managing Director at BMO Capital Markets, suggested that speculation about the New York Fed conducting yen rate checks drove the currency higher. "It's also important to note that past rate checks have not necessarily meant intervention was imminent, but the fact that the New York Fed is asking means that any potential intervention targeting USD/JPY would not be one-sided."

The 160 Level: Japan's Intervention "Red Line"

The yen had previously approached the key psychological level of 160, which was roughly the level around which Japanese authorities intervened on four occasions in 2024. The Japanese government spent nearly $100 billion in 2024 buying yen to support the currency, with the exchange rate around 160 yen per dollar during each intervention, setting a rough marker for potential future action. Earlier this month, Japanese Finance Minister Tsuyoshi Katayama and the country's top currency official issued fresh warnings to speculators following yen weakness. Japan's most recent intervention in the foreign exchange market to support its currency was in 2024, when the yen weakened past the 160 level against the dollar. Brendan Fagan, a strategist at Bloomberg's Markets Live, pointed out: "The psychological barrier appears to be forming again. Under pressure from fiscal uncertainty, rising yields, and persistent capital outflows, the path higher for USD/JPY will become increasingly narrow." However, Harvard's Furman expressed the view that rate checks, and even actual intervention, "have not historically produced sustained effects," adding that "real policy changes are needed to accomplish that." The yen has been under persistent pressure since Sanae Takaichi became Prime Minister last October, falling more than 4% due to fiscal concerns and hovering near levels that have previously triggered verbal warnings and intervention fears. Turmoil in the bond market earlier this week highlighted investor anxiety over Japan's fiscal situation, after Takaichi announced a snap election for February and promised tax cuts, sending Japanese government bond yields to record highs.

Fed Action Releases Key Signal

The New York Fed's website shows that since 1996, the Federal Reserve has intervened in the foreign exchange market on only three separate occasions, most recently in 2011 following the Japan earthquake, when the U.S. acted alongside other G7 nations to sell yen, aiming to help stabilize post-earthquake market trading. Economists at Evercore ISI, including Krishna Guha, stated:

"U.S. intervention is justifiable in the current circumstances, with the joint goal of preventing excessive yen weakness and also, hopefully, indirectly helping to stabilize the Japanese bond market. In any case, U.S. participation in FX intervention is justifiable, and even without actual U.S. intervention, it could accelerate the unwinding of yen short positions."

Ed Al-Hussainy, Global Rates Strategist at Columbia Threadneedle Investments, said: "The market's focus on the yen stems from the volatility in the Japanese bond market earlier this week. The U.S. Treasury might be nervous about spillover effects from Japanese government bonds to the U.S. Treasury market and is exploring currency intervention as a stabilization tool. Whether this risk is substantial remains an open question." Leah Traub, Portfolio Manager at Lord Abbett & Co., noted: "Given the government's past concerns about currency intervention, it appears the U.S. is giving a green light if Japan indeed needs to intervene more forcefully."

BOJ YCC Return Would Pressure Currency; Yen Strength Could Trigger U.S. Stock Sell-off

Earlier on Friday, the Bank of Japan signaled its readiness to continue raising currently low borrowing costs amid the tense political atmosphere. The BOJ raised its growth forecasts and maintained hawkish inflation projections while holding interest rates steady, demonstrating confidence that a moderate recovery would justify further increases to still-low borrowing costs. BOJ Governor Kazuo Ueda hinted that overall inflation would soon moderate to below 2%, but he also left the door open for an early rate hike. He said:

"April is a month with relatively many price revisions. We have some interest in this; while it's not the most important factor in deciding the next rate hike, it is one of the factors."

However, Governor Ueda expressed caution about market functioning during his press conference, indicating discomfort with the speed of long-term yield movements and a willingness to act if volatility becomes disorderly. Ueda stated that the central bank could, if necessary, conduct operations flexibly to smooth volatility in the bond market. From a technical perspective, Rich Privorotsky, Head of Goldman Sachs' Delta-One trading desk, characterized the BOJ's Friday actions as "maintaining the status quo with a hawkish tilt." The financial blog Zerohedge suggested that while Ueda did not formally reinstate Yield Curve Control (YCC), he did preserve a soft backstop, which initially led to yen selling before the rebound, as the perception of a potential YCC return could significantly weaken the yen. Conversely, a stronger yen could potentially trigger a sell-off in U.S. stocks. Société Générale pointed out that a peculiar correlation has emerged between the yen exchange rate and short-term U.S. stock market volatility since the equity sell-off in the summer of 2024 (driven by the unwinding of yen carry trades). The grey line in the chart below represents returns from buying very short-term S&P 500 index volatility. Since June 2025, the performance of this segment of volatility has noticeably underperformed. From this perspective, if this correlation persists, a strengthening of the yen's trade-weighted exchange rate could become a significant catalyst for broader risk-off sentiment in equity markets.