Recently, the Japanese yen has been continuously depreciating. On the morning of Monday (April 29th), the US dollar fell below the 160 mark against the Japanese yen, setting a new record for the lowest since April 1990, while also expanding the yen's intrayear decline to 10%.

But by noon, the yen suddenly seemed to have been boosted, strengthening significantly and quickly narrowing its morning decline, pulling it back to the 155 mark. As of publication, the USD/JPY is at 155.8.

The unusual fluctuations in the Japanese yen have made the outside world curious whether the Japanese authorities have intervened in the foreign exchange market.

Tony Sycamore, market analyst at IG Australia in Sydney, believes, "This move has all the characteristics of the Bank of Japan's actual intervention. When would it be a better time?"

The Japanese financial market is closed today due to the Showa Day holiday. Sycamore stated that the Japanese public holiday means a decrease in liquidity between the US dollar and the Japanese yen, with a greater impact on the Bank of Japan.

When asked if the Japanese authorities have intervened in the market to support the yen, Masato Kanda, Japan's chief currency diplomat, responded, "I will not comment at this time."

Japanese authorities will release currency intervention data at the end of each month, and the next statement will be released at 19:00 local time on Tuesday. However, the statistical scope of this monthly announcement usually does not include the last few working days of the month. Therefore, if the Japanese authorities really intervened in the market on Monday, it will not be announced to the public until the end of May.

Fiona Lim, Senior Strategist at Malayan Banking Bhd, said, "If there is no intervention, it would be dangerous to seize a falling knife, especially when the Federal Reserve may issue a signal that it will take longer to wait for a rate cut. The US dollar/yen has absolute momentum to break through the 160 yen mark, and the market is testing Japan's tolerance for a significant decline in the yen."

For over three years, the Japanese yen has been steadily declining, and since the beginning of 2021, the exchange rate of the yen against the US dollar has depreciated by more than one-third. In real terms, the Japanese yen is at least at its lowest level since the 1970s.

The depreciation of the yen is good news for Japanese exporters, but it is a headache for policymakers as it increases import costs and increases inflationary pressure.

The pressure of yen depreciation is mainly due to the huge interest rate gap between the United States and Japan. In this case, investors will sell Japanese yen and buy US dollars to earn interest rate differentials. Due to the recent downward adjustment of the Federal Reserve's interest rate cut expectations, even though the Bank of Japan raised interest rates for the first time since 2007 in March this year, it was difficult to prevent the yen from weakening.

Last week, the Bank of Japan did not implement quantitative tightening as expected, but instead decided to maintain its current monetary policy, leading to another intensification of yen selling in the foreign exchange market.

Currently, the market generally expects the Federal Reserve to maintain interest rates unchanged at its meeting later this week. At that time, the market will receive more information on the path of the Federal Reserve's interest rate cuts. Recently, several officials from the Federal Reserve have made many hawkish voices, and the market has pushed back the timing of the Fed's first interest rate cut to September.

At present, it is unlikely that market dynamics will change before people's expectations of the US interest rate path change, which will put the yen in a weak position.

"The yen will continue to face pressure until the United States releases more pessimistic growth and inflation data, and the Bank of Japan shows a clearer hawkish shift," said Homen Lee, Senior Macro Strategist at Lombard Odier in Singapore. "Given recent rumors of excessive volatility in the exchange rate market, we still believe that the Ministry of Finance is about to intervene."

At present, the yield gap between the US and Japan 10-year treasury bond is about 375 basis points, which further provides a strong incentive for yen short positions.

Christopher Wong, currency strategist at OCBC Bank in Singapore, pointed out that such a huge difference "may indicate that intervention measures may not be as effective". Wong believes that "the urgency of policy normalization demonstrated by the Bank of Japan, combined with the Ministry of Finance's foreign exchange intervention, may be more effective than the Ministry of Finance's individual intervention."

Nicholas Chia, Asia Macro Strategist at Standard Chartered Bank in Singapore, said, "If today's move represents government intervention, then it is unlikely to be a one-time measure."

In 2022, the exchange rate between the US dollar and the Japanese yen fell to nearly 152. As a result, Japan intervened in the market three times, selling over 60 billion US dollars to buy the yen in order to stabilize the yen exchange rate. Afterwards, the market generally believed that 152 was an important psychological barrier for the Japanese authorities. From the recent trend of the Japanese yen, 160 seems to have become a new psychological barrier for the Japanese authorities.

Chia said, "If the US dollar falls to 160 against the Japanese yen again, we may expect the Treasury to take more follow-up action. In a sense, the level of 160 represents a painful threshold, or a new bottom line for the authorities."