Highlights
- Japan’s yen interventions have triggered sharp volatility in global equity and currency markets
- Past interventions had a drastic impact on Japanese and global equity markets
- US-Japan coordination has provided only temporary relief for the yen
- Analysts warn that intervention alone is unlikely to stabilise markets without a Bank of Japan rate hike
- A rate hike can trigger another round of unwinding of the yen carry trade
While Indian equity markets grapple with their own challenges—foreign investor exodus amid disappointing corporate earnings—a far more serious issue is unfolding in global currency markets. The Japanese yen’s decline threatens to add volatility across equity markets worldwide. History suggests that unless this currency crisis is arrested, investors should brace for heightened turbulence and accelerated selling pressure.
Understanding yen intervention
At the heart of this crisis lies the question of government intervention in currency markets. Yen intervention occurs when the Japanese government, typically through the Bank of Japan and the Ministry of Finance, actively buys or sells yen in foreign exchange markets to influence its value. The goal is to prevent excessive currency movements that could damage the Japanese economy—a very weak yen inflates import costs and drives up inflation, while an overly strong yen undermines exporters by making Japanese goods less competitive globally.
Historically, Japan intervened to weaken the yen when it became too strong. However, the playbook changed dramatically from 2022 to 2024. As the Bank of Japan maintained ultra-low interest rates while the Federal Reserve and other central banks aggressively hiked rates, investors fled to higher-yielding currencies, sending the yen plummeting to multi-decade lows. Japan was forced to reverse course, intervening to support rather than suppress its currency.
Throughout 2024, Japan conducted four separate interventions whenever the yen approached or breached 160 per dollar, collectively spending nearly $100 billion to prop up the currency. The market response was violent and immediate.
When Japan intervened in late April and early May 2024, deploying a record $36.9 billion in yen purchases on April 29, the Nikkei 225 plunged 12 percent. By July 11, the index had fallen 27% from its peak, illustrating how yen strengthening creates immediate headwinds for Japan’s export-heavy economy.
The most dramatic episode came in early August 2024, not from intervention alone but from the Bank of Japan’s rate hike and the subsequent unwinding of yen carry trades. On August 5, Japan’s Topix and Nikkei 225 indexes crashed more than 12%—the steepest single-day drop since 1987. Global markets followed suit, though with smaller percentage declines. The cryptocurrency sector bore the brunt, with most coins recording losses up to 20 percent.
Yet the recovery proved equally swift. Within 24 hours, the Nikkei surged 10.2 percent as the Bank of Japan signalled it wouldn’t raise rates further amid market instability. This whipsaw action underscored the short-term, violent nature of yen intervention’s impact, even as markets generally discount these events before they occur.The current crisis
Fast forward to January 2025, and the same dangerous dynamics are reappearing. The yen approached 159.225 on January 23 before sharp warnings from Prime Minister Sanae Takaichi triggered a pullback to 155.6. The pair fell further to 154.2 on January 26—its lowest level since mid-November. But the relief was short-lived as the currency has since rebounded toward 160, with analysts predicting it could reach this critical threshold within days if weakness continues.
The market received an unprecedented signal on January 24 when the Federal Reserve Bank of New York contacted financial institutions about the yen’s exchange rate—a move typically seen as a precursor to intervention and potential coordinated US-Japan action. This sparked the biggest one-day yen rally since August. As analysts warn, when the US Treasury starts making calls, it signals that the situation has escalated beyond a normal foreign-exchange story.
For now, intervention fears alone have pushed the yen off 18-month lows, offering temporary relief to Japanese policymakers concerned about the currency’s inflationary impact.
Political and economic headwinds
The timing couldn’t be worse for Japanese authorities. With snap elections scheduled for February, the 160 level has become a politically charged crisis indicator that resonates with Japanese voters, according to local media. The bond market reflects this stress—the 40-year JGB yield broke 4% on January 20 for the first time since 1995, while 30-year yields hit 3.875%, both at historic highs. Meanwhile, traders hold record-high short positions in the yen, making the market vulnerable to a violent squeeze.
Compounding the challenge, nearly all ruling and opposition parties are calling for tax cuts ahead of the election, a stance that adds pressure on the yen.
The intervention dilemma
The critical question is whether intervention can actually stabilise markets. Analysts remain deeply sceptical. They warn that intervention without supporting policy changes will likely prove ineffective, potentially even allowing traders to build larger short positions within hours. The real solution, they argue, requires a Bank of Japan rate hike, potentially at the upcoming meeting.
According to a DBS report, the Bank of Japan is behind the curve in normalising monetary policy, while the government has fallen short of its debt consolidation targets. Yet the broader economy shows resilience—public debt concerns arise amid an economy experiencing vibrant private capital-market activity for the first time in decades, with flourishing M&A activity and a soaring domestic stock market. Japan’s public sector debt remains a source of concern, but economic momentum appears unlikely to be derailed. Still, the yen’s overshooting may require intervention, especially given the risk of antagonising the United States.
The limits of US-Japan coordination
Despite signs of coordination between Washington and Tokyo, analysts doubt this represents a lasting solution. Shota Ryu, FX strategist at Mitsubishi UFJ Morgan Stanley Securities, observes: “In reality, the US probably doesn’t want to buy a currency like the yen that has seen its value depreciate for five straight years. Washington could possibly cooperate with one small intervention. But it won’t help in a way that could have a lasting effect in turning around the yen’s downtrend.”
The constraints are mutual. Japan would need to sell portions of its US Treasury holdings to sustain its yen-buying intervention—a move that could push up US yields, something Washington would oppose amid current market volatility. As Takuya Kanda, analyst at Gaitame.com Research Institute, notes: “It’s unlikely the US, worried about global de-dollarisation, will conduct direct dollar-selling intervention.”
The greater market risk
Perhaps the most significant threat lies in what another round of intervention could trigger. A rise in interest rates risks another unwinding of yen carry trades, potentially recreating the August 2024 market chaos. The rapid unwinding demonstrated how a single policy change in Japan can send profound ripples across interconnected global markets, with investors worldwide experiencing significant losses.
The Japanese government must navigate between allowing inflationary currency weakness and triggering market chaos through heavy-handed intervention. Without genuine monetary policy normalisation from the Bank of Japan, any intervention risks becoming a costly, temporary Band-Aid.
Whether through coordinated intervention, interest rate hikes, or market forces alone, resolution appears inevitable. The question is not if but when—and at what cost to global financial stability. Investors would be wise to monitor the 160 level closely, as a breach could mark the beginning of another turbulent chapter in the ongoing yen crisis, with reverberations felt far beyond Tokyo’s trading floors.
