Options traders are increasing their premiums to hedge against potential sharp swings in the Japanese yen ahead of an upcoming period of thin trading due to a US holiday, as markets grow more convinced that Japanese authorities could be unpredictable in their efforts to support the currency.

The negative value of the one-week dollar-yen risk reversal gauge has deepened further, signaling stronger market demand for yen call options relative to dollar calls. Concurrently, the one-week butterfly spread has widened, indicating investors are paying higher premiums to guard against significant price movements in either direction.

Collectively, these moves show traders are positioning for increased market turbulence with a bias towards yen strength, reflecting concerns that the Japanese government might intervene in the currency market. The anticipated lack of liquidity around the US Independence Day holiday could amplify any dramatic moves in the currency pair.

Earlier this week, the yen hit its weakest level against the dollar since 1986. It then rebounded nearly 1% on Thursday as weaker-than-expected US non-farm payrolls data weighed on the dollar. On Friday, the yen briefly strengthened past 161 per dollar following remarks from Japan's Finance Minister Shunichi Suzuki, who stated he expects the Bank of Japan to implement appropriate monetary policy to achieve its price target.