Yen Traders Rattled As Slide To 34-Year Low Sparks Japan Warning

(Bloomberg) -- In the hours after the yen hit a 34-year low on Wednesday, Japanese officials put currency traders on notice: Keep this up and we’ll act forcefully in the market to stem the slide.

The message was heeded, at least initially. 

After coming within a whisker of touching 152 per dollar — a level that a slew of market observers said would likely prompt authorities to intervene directly — the yen reversed course on warnings from Japan’s finance minister and then a news report that the nation’s economic authorities were gathering for an unscheduled meeting. 

But the rebound was modest and faded as the day wore on. The yen was trading around 0.2% stronger at 151.30 per dollar around midday in New York, showing how tough it may be to alter market sentiment. The moves also capture just how jittery traders have become around the yen’s slide. It has lost about 7% this year against a broadly advancing dollar, making it among the weakest major currencies.

“Market perception is they have drawn a line in the sand at 152,” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi, US. “The key question is their commitment.” 

Profitable Bet

For months, betting against the yen has been profitable as the Bank of Japan stuck to a program of negative interest rates to help combat deflation. The latest leg of yen losses came even after the BOJ tightened policy last week for the first time in 17 years, while also signaling that it wasn’t about to embark on a series of rate hikes. 

For policy makers, the challenge is that after fretting for decades that inflation was dangerously low, the threat now is that a plunging yen could trigger a spike in prices that would derail an economy that is hugely reliant on imports of key products such as oil.

The yen’s relentless slide is a sign that BOJ policy remains too loose to anchor the yen, especially with the Federal Reserve holding its benchmark rate at the highest in more than two decades and likely months away from a potential move to ease.

For their part, Japanese officials say the recent moves have been speculative, with Japan’s top currency official Masato Kanda earlier Wednesday pledging to take appropriate action against excessive swings in the market. 

“The rise in USD/JPY towards 152 has clearly rattled a few cages in Tokyo,” said Peter Kinsella, the global head of FX strategy at Union Bancaire Privee. “I expect interventions sooner rather than later.”

Read more: Japan FX Chief Ramps Up Warning After Yen Hits 34-Year Low

Other market watchers are taking a more sanguine approach, saying the outright level of the yen matters less than the scale and scope of the daily moves. 

“I don’t think there is anything to worry about here on the intervention front as they just don’t have the big whippy moves that you would normally see prior to an intervention,” said Brad Bechtel, global head of FX at Jefferies. “If we gapped through 152 and then up to 155 in a very short period then maybe they would jump on it, but if we are just bouncing around and grinding higher, not so much of a concern.”

However, for those betting on a continued slide, the risks are building. 

Citigroup Inc. strategists including Daniel Tobon say the short yen trade is looking “crowded” and that bets on further losses could be “vulnerable,” adding that intervention is likely between 152 and 155. 

“The meeting with key policymakers is an escalation beyond just jawboning but falls far short of actual action,” said Brown Brothers Harriman’s Win Thin, the global head of markets strategy. “As such, we expect the market to continue testing their commitment to defending the yen.”

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