Bank of Japan intervention to strengthen the yen over the weekend in Japan

The Japanese yen fell to a new 34-year low against the dollar early Monday but then rose sharply as traders worried that Tokyo had intervened to prop up its beleaguered currency.

As Japanese markets closed for Showa Day, weak trading in Asia saw USD/JPY (USDJPY) quickly jump two yen to above 160, the yen's weakest level against the US dollar since 1990.

This has pushed USD/JPY up about 12% so far this year, with the dollar strengthening against the yen in response to widening bond yield differentials.

Yields on two-year US Treasuries rose 75 basis points in 2024 to 5% after signs of persistent inflation and strong economic data increased the chances of a rate cut by the Federal Reserve.

By contrast, Japan's two-year government bond yield is just 0.3% as the Bank of Japan keeps borrowing costs at 0.1% for fear of another slide into deflation. The latest weakness in the yen comes after the Bank of Japan left policy unchanged on Friday.

Japanese authorities have warned in recent weeks that the yen's fall has gone too far and hinted they might hit the market to support it.

And shortly after USD/JPY rose above 160 on Monday, it fell sharply, at one point falling to 155. By the time European forex dealers took to their desks, the pair had stabilized at 156. 80, down 0.9% on the day.

Japan's top currency official, Masato Kanda, was reportedly tight-lipped on whether the Treasury was intervening in the market, saying: "No comment yet."

While Japanese officials have consistently insisted they are not targeting specific levels, but rather the rate at which the yen is falling, Takao Ochi of the Liberal Democratic Party said last week that the 160 level could be the target.

Stephen Innes, managing partner at SPI Asset Management, said it appeared the Treasury had intervened, but noted the impact was relatively temporary. “Despite initial selling pressure on the dollar hitting 155, USD/JPY quickly recovered to levels seen immediately after the BOJ decision [on Friday].”

"However, the underlying drivers of USD/JPY remain largely unchanged. The currency pair is very sensitive to changes in the US 10-year yield, with yield differentials continuing to favor the dollar," Innes added.