Recently, the Japanese yen exchange rate has become the focus of the global financial market. Speculations about joint intervention in the foreign exchange market by the United States and Japan are in sharp opposition to the negative attitude of the United States. Superimposed on Japan's domestic policy environment and global market fluctuations, the trend of the Japanese yen has fallen into a complex game, and at the same time triggered a chain reaction of assets such as the US dollar and precious metals.

Market movements: Japanese yen rebounds and intervention speculation heats up

This week, the yen has rebounded significantly against the U.S. dollar. In early trading in Sydney, the yen rose 0.5% to 154.90 against the U.S. dollar, hitting its strongest level since December 17 last year and continuing last Friday's gains. During the trading session last Friday, the Japanese yen fluctuated particularly violently. It first approached the 160 mark that had appeared in 2024, and then bucked the trend and rose 1.75% to 155.63, the largest single-day increase since August last year.

The core driver of this wave of yen movements is the market's strong speculation on foreign exchange market intervention. On Friday, traders reported that the New York Fed had contacted financial institutions to inquire about the yen exchange rate, while Japan's top foreign exchange official declined to comment. "Exchange rate checks are usually the last warning before taking (intervention) action," Michael Brown, senior research strategist at Pepperstone Group, pointed out that compared with the previous government, Takaichi Sanae's cabinet has a significantly lower tolerance for speculative foreign exchange fluctuations. Japanese Prime Minister Takaichi Sanae directly warned during the party leader's TV debate on Sunday that he would "take all necessary measures to deal with speculative and highly abnormal market fluctuations." Although he did not explicitly point to the currency market, combined with the recent trend of the yen, it further strengthened expectations for intervention.

The market's focus on intervention is also closely related to key time nodes. Japan is about to hold a snap election for the House of Representatives on February 8. The 160 mark is regarded as a threshold of special political significance. For Japanese voters and market commentators, this round number mark is regarded as a major crisis indicator. If the yen touches this level before the election, the possibility of Japanese authorities taking action will increase significantly. In 2024, the Japanese government intervened four times when the yen-dollar exchange rate was close to 160, spending a total of nearly 100 billion U.S. dollars to purchase yen. This also made the market regard this point as an important reference for potential intervention.

Core differences: Contradictory attitudes between the United States and Japan and hidden concerns about the effectiveness of intervention

Although the market's expectations for joint intervention have increased, the differences in attitudes between the United States and Japan have become the biggest variable, making the actual effect of the intervention full of uncertainty. The US position has always remained negative. Previously, U.S. Treasury Secretary Bessent made it clear that the United States had "absolutely no" plans to intervene in the U.S. dollar-yen market. These remarks directly caused the yen to plummet by 1.2%, the largest drop in more than five weeks. Analysts generally believe that the effect of Japan's unilateral intervention will be greatly reduced - "Without the participation of the United States, any unilateral intervention by the Japanese Ministry of Finance will be greatly reduced in resisting downward pressure on the yen, which means that any gains after the intervention may quickly fade," said Carol Kong, a strategist at the Commonwealth Bank of Australia. From the perspective of the United States, in the absence of simultaneous changes in monetary policy fundamentals, the probability of long-term success of intervention is extremely low, and the attractiveness is naturally insufficient.

Historical data also confirms this judgment. Japan's four unilateral interventions in the foreign exchange market in 2024 were only able to briefly boost the yen each time, but failed to reverse its overall downward trend over the years. The market repeatedly tested the determination of policymakers. Foreign exchange market intervention is usually decided by Japan's Ministry of Finance, and the Bank of Japan sells U.S. dollars in the spot market through a few commercial banks to support the yen, but this unilateral action is often just a "flash in the pan." However, the market has not completely given up on the fantasy of joint intervention. Some traders interpreted the New York Fed's exchange rate review as a prelude to coordinated actions by the United States and Japan, recalling that the United States has only intervened in the currency market alone three times since 1996, the most recent being a joint sell-off of the yen by G7 members to stabilize the market after the 2011 earthquake in Japan. "When the U.S. Treasury Department starts making calls, it usually means that this has transcended the realm of ordinary foreign exchange stories," said Anthony Doyle, chief investment strategist at Pinnacle Investment Management. Coordinated actions similar to "Plaza Accord II", although unusual, are no longer considered completely impossible.

The fundamental crux: the fundamental dilemma of a weak yen

Even if the intervention is implemented, the market generally believes that if the fundamental issues are not resolved, the long-term trend of yen depreciation will be difficult to reverse. Currently, multiple factors continue to drag down the trend of the yen. At the monetary policy level, the Japanese yen still faces significant policy pressure. Japan's real interest rates continue to be negative and inflation remains above 2%, but overnight index swaps show traders are pricing in only two rate hikes by the Bank of Japan this year, reinforcing the view that policy is still behind the curve. "Unless we see a policy shift from the Bank of Japan, foreign exchange intervention is unlikely to have a more lasting impact on the yen," said Rodrigo Catril, currency strategist at National Australia Bank Ltd.

Fiscal risks further added to pressure on the yen. The ruling Liberal Democratic Party is generally expected to win a majority of seats in the February 8 general election, and the market is worried that it will launch a radical fiscal stimulus policy. Takaichi Sanae has promised to cut food taxes. This type of unfunded expansionary fiscal policy has not only impacted the Japanese bond market - the 40-year Japanese government bond yield has recently soared to more than 4%, setting a new high since its launch in 2007. It has also continued to put depreciation pressure on the yen. "In the current macro environment that focuses on increased fiscal spending, intervention will only delay but not reverse the trend of yen depreciation," said Wu Rongren, fixed income portfolio manager at Eastspring Investments.

Market linkage: The dollar weakens and precious metals strengthen simultaneously

The Japanese yen exchange rate game is not an isolated incident. The market sentiment it triggered has been transmitted to the U.S. dollar, precious metals and other asset fields, forming a significant linkage effect. The precious metals market took advantage of the situation to strengthen and became the "beneficiary" of the Japanese yen currency market game. As geopolitical risks rise and investors' confidence in legal currencies is shaken, "currency devaluation transactions" heat up, and funds are withdrawing from legal currencies and turning to safe-haven assets. In early trading on Monday, spot gold broke through the integer mark of US$5,000/ounce for the first time in history. As of the relevant period, it was trading at US$5,086.50/ounce, up more than 2% on the day. Spot silver also made simultaneous efforts, exceeding US$107/ounce, with a cumulative increase of more than US$35 this month, both achieving outstanding performances.

In the U.S. dollar market, speculation about U.S.-Japanese joint intervention further intensified the market's pessimism about the U.S. dollar. On Monday, the U.S. dollar weakened against most major currencies, with the Bloomberg Dollar Index falling as much as 0.3%, continuing last week's 1.6% decline, and the index has fallen more than 9% since the beginning of last year. Analysts believe that if the United States and Japan reach a coordinated intervention agreement, it will essentially guide the U.S. dollar lower against the currencies of its major trading partners, which will further intensify short-term downward pressure on the U.S. dollar. In addition to intervention factors, the U.S.’s own policy uncertainty is also dragging down the U.S. dollar. President Trump has frequently wielded the tariff stick recently, from threatening to impose additional tariffs on Europe to threatening to impose 100% tariffs on Canada. In addition, the market is worried that the independence of the Federal Reserve has been damaged and may be forced to cut interest rates quickly in the future. Multiple factors have combined to weaken the attractiveness of the U.S. dollar as a global reserve currency.

Outlook: Key variables and market game focus

Looking ahead, the trend of the Japanese yen exchange rate will depend on the game of multiple key variables, and the market's core focus is on three major aspects.

The first is the implementation of intervention actions. If Japan intervenes unilaterally at the 160 mark, the effect is expected to be limited in the short term, and the yen may rebound before coming under pressure; if the United States participates in coordinated intervention, it will effectively support the yen and suppress the dollar. Analysts predict that under the current background that the United States does not support intervention, the dollar against the yen may return to around 155 and test the 158 mark.

Second, Japan’s domestic policy may shift. The fiscal policy after the February 8 election and the pace of interest rate hikes by the Bank of Japan will play a decisive role in the fundamentals of the yen. Analysts pointed out that only by accelerating interest rate hikes by the central bank or exercising restraint in fiscal policy can lasting stability of the yen be achieved, and it is difficult to change the long-term trend through intervention alone.

The third is the linkage effect between global market sentiment and assets. The trend of the U.S. dollar and the sustainability of the rally in precious metals will adversely affect the demand for safe havens in the Japanese yen: a weaker U.S. dollar and rising risks may support the yen; if intervention expectations fail, the yen may return to the depreciation channel, and the rally in precious metals may also correct.

Overall, the game in the Japanese yen foreign exchange market has gone beyond simple exchange rate fluctuations and has become an important clue affecting global asset allocation. Against the background of divergent attitudes between the United States and Japan, weak Japanese fundamentals, and rising global policy uncertainty, subsequent market volatility may intensify. The Japanese election on February 8, the policy trends of the Bank of Japan, and the change in attitude of the United States will become the core variables that determine the trend of the yen and the linkage pattern of assets.