Yen surges against dollar amid suspected intervention

The Japanese yen experienced a sharp surge against the dollar on Monday, attributed by traders to suspected intervention by Japanese authorities. The currency, which had been lingering at levels not seen in over three decades, saw a notable rebound.

The dollar dropped to a low of 154.40 yen after reaching as high as 160.245 earlier in the day. Reports from banking sources indicated that Japanese banks were observed selling dollars in exchange for yen, leading to the yen's strengthening. As a result, the US currency was last seen trading at 156.22 yen.

According to The Wall Street Journal, Japanese financial authorities were reportedly involved in the intervention, citing sources familiar with the matter. Traders had been anticipating action from Tokyo to support the yen, which has depreciated by 11 per cent against the dollar this year, reaching historic lows.

Despite the Bank of Japan's recent departure from negative interest rates, the yen remained under pressure due to expectations of persistently low Japanese rates compared to relatively higher rates in the United States. This discrepancy has led to a continuous outflow of Japanese funds abroad, further weakening the yen.

Japanese government bonds offer yields significantly lower than US Treasuries, attracting Japanese investors to foreign markets. However, the weaker yen poses challenges for policymakers, increasing import costs, inflationary pressures, and impacting households.

While Bank of Japan Governor Kazuo Ueda emphasized that monetary policy does not directly target currency rates, exchange-rate volatility could have significant economic consequences.

The suspected intervention occurred ahead of the Federal Reserve's policy review on May 1. Expectations for Fed rate cuts have been delayed due to elevated US inflation, prompting policymakers to emphasize data-dependent rate changes.

In response to the yen's depreciation, the BOJ intervened in the currency market three times in 2022, selling the dollar to purchase yen. Tokyo's efforts to defend the yen come amid increased cooperation among the United States, Japan, and South Korea to monitor currency markets closely.

As the yen continues to weaken against major currencies, including the euro, Australian dollar, and Chinese yuan, the actions of Japanese authorities in the foreign exchange market are closely monitored for their potential impact on global currency dynamics.