The Japanese Yen exchange rate breaks through the 3400 level, signaling potential policy intervention by Japan and the US

Since late January, the Japanese yen has experienced a rapid appreciation. The USD/JPY exchange rate fell below the critical level of 154, hinting at coordinated adjustments by multiple countries’ policymakers. On January 23, the New York Federal Reserve proactively contacted major financial institutions to inquire about USD/JPY quotes. This move was immediately interpreted by the market as a strong signal that the U.S. is prepared to cooperate with Japan on foreign exchange market intervention. The exchange rate fluctuation around 3,400 yen reflects substantial collaboration among trans-Pacific policymakers.

Cross-National Policy Interventions: From the Plaza Accord of 1985 to Today

Joint intervention in currency markets across countries is rare. Since the signing of the Plaza Accord in 1985, such coordinated actions have only occurred six times globally. These actions typically respond to major economic shocks, such as the Asian financial crisis in 1997, the Great East Japan Earthquake in 2011, or broader international cooperation involving multiple currencies, like the Louvre Accord of 1987.

What has triggered this rare policy coordination now? The background lies in changes in Japan’s political and economic landscape. Japanese Prime Minister Fumio Kishida announced the dissolution of the House of Representatives and called for early elections on January 23, with results to be announced on February 8. Her promise of large-scale tax cuts has raised concerns among international investors about Japan’s fiscal sustainability, leading to record-high yields on Japanese government bonds. This development has shaken the entire market.

Policy Intentions and Market Impact: The Accelerated Exit of Yen Shorts

Evercore ISI economist Krishna Guha analyzed: “In the current environment, U.S. involvement in foreign exchange intervention is a reasonable policy choice. The joint goal is to prevent excessive yen weakness and to stabilize the Japanese bond market indirectly through currency stabilization.” He further noted that even without actual intervention by the U.S., such policy signals alone are enough to prompt yen short-sellers to accelerate their closing of positions.

This explains why the yen has appreciated so sharply in the short term. Short sellers face dual pressures: policy intervention expectations and technical stop-loss cover. The exchange rate around 3,400 yen has become a key level in this adjustment.

Diverging Views on Future Trends

Market participants hold differing opinions on the yen’s future direction. Brent Donnelly, senior forex trader at Spectra Markets, believes Japan’s Ministry of Finance is most likely to take concrete intervention actions. He points out that a low-probability scenario involves Japan, South Korea, and the U.S. reaching an agreement to prevent excessive depreciation of the yen and won, thereby jointly stabilizing the currencies. Based on these expectations, he anticipates the USD/JPY downtrend will continue.

Kinen Holdings’ senior strategist Keiichi Inoguchi agrees, suggesting that the previous yen depreciation trend will temporarily pause. He notes that the market’s focus will shift to a range-bound oscillation of USD/JPY between 150 and 155, which has become the new key support level.

However, Goldman Sachs remains cautious. The firm states that unless the Bank of Japan adopts a more hawkish monetary stance or initiates quantitative easing to stabilize the bond market, the yen and Japanese bonds will continue to face downward pressure. This implies that short-term policy interventions may only be band-aids, and long-term solutions will require further action from policymakers.

The oscillation of the yen around 3,400 reflects heightened global policymakers’ concern for Japan’s economic stability and signals that the foreign exchange market may enter a new phase driven by policy considerations.