The latest current account data released by the Bank of Japan did not show clear signs that Tokyo authorities intervened to buy yen last Friday, despite significant market volatility that day. While this marked the first potential intervention window since July 2024, and the data failed to confirm any action, the officials' hawkish rhetoric has put the market on high alert for a potential policy shift.
Data released by the BOJ on Monday indicated that the current account balance is expected to decrease by 630 billion yen on Tuesday due to fiscal factors. Although this figure exceeded the average forecast of a 167 billion yen decline by money brokers, the gap between the two is far smaller than the 729 billion yen, the smallest single intervention amount since 2022. This relatively minor discrepancy makes it difficult for the market to determine whether authorities conducted a small-scale "probing" purchase or did not intervene at all.
Despite the lack of concrete evidence from the data, the yen continued its upward trend, with the USD/JPY pair falling over 1% to 154.01 on Monday. This was primarily driven by a series of hawkish statements from Japanese Prime Minister Sana Takaichi and financial officials recently. Takaichi warned of cracking down on market speculation and pledged to take action when necessary. Furthermore, market speculation that the Federal Reserve Bank of New York's rare "rate-checking" action could be a precursor to intervention has even sparked discussions about the possibility of a "Plaza Accord 2.0."
These developments come during a sensitive period ahead of Japan's snap election on February 8. Prime Minister Sana Takaichi explicitly stated she would resign if the ruling coalition fails to secure a majority, adding a layer of political uncertainty to the market. Concurrently, the yen's rebound has alleviated pressure on Japan's ultra-long-term government bond market, and this policy-driven "controlled reset" is reshaping investor expectations for Japanese assets.
The estimated 630 billion yen decline in the current account balance due to fiscal factors, as per BOJ data released Monday, did not constitute "ironclad evidence" of authorities' substantial intervention last Friday, even though it was higher than the average forecast of a roughly 167 billion yen decline by Central Tanshi, Ueda Yagi Tanshi, and Tokyo Tanshi Research.
The magnitude of the gap between this data and the forecast is significantly narrower than the lower limit of intervention sizes since 2022. Statistics show that the smallest intervention since then amounted to 729 billion yen (approximately $4.7 billion). This ambiguity has left analysts unable to confirm whether authorities conducted an extremely small, covert intervention or relied solely on "verbal intervention" to steer market expectations.
Although the actual intervention remains a mystery, the intensity of official verbal warnings is significantly escalating. Japanese Prime Minister Sana Takaichi reiterated on Monday that she would closely monitor speculative moves and act when necessary. She had previously stated she would take "all necessary measures" against abnormal volatility. Discussing market trends, she noted multiple factors behind the fluctuations and emphasized that Japan's primary budget balance had achieved a surplus for the first time in 28 years, with the government continuing to focus on fiscal sustainability.
Meanwhile, close communication between Finance Minister Tsukasa Akimoto and US Treasury Secretary Besant, coupled with reports that the Federal Reserve Bank of New York contacted financial institutions to inquire about yen exchange rates, has further fueled market speculation about coordinated action. Masahiko Loo, Senior Fixed Income Strategist at State Street Global Advisors, pointed out that historically, the Ministry of Finance's rate checks have often been a precursor to action. He noted that a lack of follow-up action could fuel speculative pressure, leading the market to test official boundaries.
With signs of US-Japan coordination emerging, some traders have begun to draw parallels to the 1985 "Plaza Accord." Anthony Doyle, Chief Investment Strategist at Pinnacle Investment Management, believes Japan cannot solve the yen problem alone without risking domestic pressure or global spillover effects. Therefore, the idea of a "Plaza Accord 2.0," meaning coordinated action, no longer seems far-fetched. He indicated that when the US Treasury begins to intervene, it usually signifies that the situation has moved beyond the scope of routine foreign exchange fluctuations.
Homin Lee, Senior Macro Strategist at Lombard Odier, stated that if the goal is a genuine attempt to stabilize the USD/JPY rate, Tokyo must ultimately undertake actual market intervention. He believes that if both Japan and the US intervene, it would be an "unusually public display of bilateral coordination." According to public records, the US has intervened in foreign exchange markets only three times since 1996, most recently following the 2011 Japan earthquake.
The rebound in the yen exchange rate is triggering a repricing of Japanese financial assets. With yen short positions reaching their highest level in over a decade, the current rally could force a massive short squeeze. Influenced by this, the Japanese Government Bond (JGB) market has also experienced significant volatility, with the benchmark 10-year JGB yield falling 3 basis points to 2.225% on Monday.
More critically, the stronger yen provides a breathing space for Japanese bond issuance. The yield on the 40-year JGB, which had previously surged above the key 4% level, has retreated. Bloomberg strategists noted that for the upcoming 40-year bond auction this Wednesday, a stronger yen would be a major relief factor, making the auction appear set to proceed smoothly. This signals that the market is undergoing a policy-driven reset, and the appeal of one-way bets on yen depreciation and selling JGBs is diminishing significantly.
Beyond market dynamics, political factors have become a key variable influencing the yen's trajectory. Facing the snap election on February 8, Prime Minister Sana Takaichi has linked her political future to the outcome, stating she will resign if the ruling coalition loses.
On the policy front, Takaichi revealed a desire to submit a bill to suspend the food tax in fiscal 2026 and continue supporting companies in achieving wage growth. These policy pledges, intertwined with exchange rate stabilization measures, create a complex macroeconomic backdrop ahead of the election. Looking back to 2024, the Japanese government spent nearly $100 billion to support the yen, with all four interventions occurring near the 160 level. Now, as the yen again approaches this key point, market expectations for another intervention by authorities remain high.