The Japanese yen's rally extended further on Monday. Prompted by the yen's recent weakness, traders began the week on high alert for potential currency market intervention by the Japanese government. During early Asian trading, the yen appreciated by nearly 1% against the U.S. dollar to 154.23, reaching its highest level in over a month. This surge was fueled by warnings from Japanese Prime Minister Sanae Takaichi issued on Sunday, coupled with signals from last Friday suggesting the United States might join Japan in defending the yen. Concurrently, boosted by demand as the U.S. dollar weakened, gold rose 0.8% to $5,029.05 per ounce, continuing its momentum from last week's cumulative 8.5% gain.

Prime Minister Takaichi stated that the "government will take all necessary measures to address speculative and extremely abnormal market fluctuations." Her remarks did not specifically mention the yen or the volatile Japanese government bond (JGB) market. Although she prefaced her comments by noting that, as Prime Minister, it is inappropriate to comment on "matters that should be determined by the market," Japan's Finance Minister had previously clarified that Japan is prepared to act autonomously, including through currency intervention, as needed. The current yen strength represents a continuation of its rebound after touching the 160 level against the dollar last Friday, a zone considered high-risk for intervention.

Speculation about intervention intensified during the latter part of Friday's Tokyo trading session, triggering a reversal in the yen's decline. During U.S. stock market hours, the rally accelerated further after traders reported that the New York Federal Reserve had contacted several financial institutions to check yen exchange rates. On Friday, the yen climbed as much as 1.75%, marking its largest single-day gain since August 1. The New York Fed's rate checks, along with recent close communication between Japan's Finance Minister Shunichi Suzuki and U.S. Treasury Secretary Janet Yellen, have led traders to believe coordinated intervention between the two nations is a possibility.

Commenting on the potential for intervention, Michael Brown, Senior Research Strategist at Pepperstone Group Ltd., said, "Rate checks are typically the final warning before actual intervention is undertaken. Compared to previous administrations, the Takaichi government has a much lower tolerance for speculative volatility in the currency market." The news of the New York Fed's actions is likely to deter the market from casually betting on further yen weakness, while also forcing the closure of a significant number of short yen positions—which recently saw their largest increase in over a decade.

The sharp volatility in the foreign exchange market has been accompanied by turmoil in the Japanese government bond market. Early last week, yields on Japan's super-long-term bonds soared to record highs before subsequently pulling back. Nick Twidale, Chief Analyst at AT Global Markets in Sydney, stated, "Based on Prime Minister Takaichi's comments, traders need to be extremely cautious at the open on Monday." He expects the yen to fluctuate around 155 against the dollar early in the week.

Twidale added, "There is still a broad willingness in the market to short the yen, but trading will be very cautious due to the verbal intervention from officials. If the U.S. side was indeed involved in these rate checks, the impact would be significant, affecting not just the yen but global markets as well." Some traders view the possibility of coordinated intervention by Japan and the U.S. as reminiscent of the 1985 Plaza Accord—an agreement among major global economies that successfully engineered a depreciation of the U.S. dollar. Discussions about policy responses to economic imbalances caused by a "persistently overvalued U.S. dollar" have been ongoing for over a year.

According to data on the New York Fed's website, the United States has intervened in the currency market only three times since 1996. The most recent instance was in 2011 following the major earthquake in Japan, when the U.S., alongside other G7 members, sold yen to help stabilize currency trading. Anthony Doyle, Chief Investment Strategist at Pinnacle Investment Management, commented, "If Japan acts unilaterally to boost the yen, it risks creating domestic market pressure and potential global spillover effects. Therefore, for some market participants, the prospect of U.S.-Japan coordinated intervention, achieving a sort of 'Plaza Accord II,' is no longer far-fetched. Active involvement from the U.S. Treasury often signifies that the issue transcends normal foreign exchange market fluctuations."

In 2024, the Japanese government spent nearly $100 billion in total on buying operations to support the yen, taking action on each of the four occasions the currency touched the 160 level against the dollar. This specific level has thus become a key reference point for the market to anticipate further intervention. Homin Lee, Senior Macro Strategist at Lombard Odier, pointed out, "Ultimately, if the Japanese government is serious about anchoring the dollar-yen rate this time, it must follow through with actual intervention." He also noted that simultaneous intervention by both Japan and the U.S. would be "a rare public display of bilateral coordination."

Lee added, "For many Japanese voters and market commentators, the round number of 160 cuts through complex political headlines as a clear signal. Ahead of the snap Lower House election in February, this level is bound to be viewed as a major crisis indicator." Japan is preparing for a snap election for the Lower House on February 8. Recently, Prime Minister Takaichi's pledge to cut the food consumption tax caused significant upheaval in the Japanese bond market. The yield on Japan's 40-year government bond broke above 4%, setting a record high since the bond's issuance and also marking the highest yield for Japanese government bonds of any maturity in over three decades.

Rong Ren Goh, Fixed Income Portfolio Manager at Eastspring Investments, stated, "In the current macroeconomic environment, with Japan's fiscal spending in an expansionary phase, currency intervention can only delay the yen's depreciation trend; it cannot fundamentally reverse it."