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Suspected Japanese intervention to sell USD/JPY has come at a weak time for the dollar after last week’s geopolitical fracturing. From what we understand so far, Japanese authorities may have intervened on Friday when USD/JPY pushed above 159 after the Bank of Japan policy meeting. The big kicker, however, was widespread discussion that at the London close at 17:00 GMT on Friday, the Federal Reserve started asking banks in New York about their position sizes in USD/JPY. This was seen as akin to a ‘rate check’, where a central bank might be preparing the market for physical intervention. That the Fed was allegedly doing this and not making clear that this activity was purely on behalf of Japanese authorities – i.e., that the Fed was not acting purely as an ‘agent’ – has led to understandable suggestions that the US might be on the verge of joint intervention with Japan. This is something we discussed in this month’s FX Talking.

The prospect of bilateral Japan-US intervention is understandably a more powerful one than mere passive intervention from Tokyo alone. Why would Washington want to get involved? We see two reasons: a) the weak yen was adding to last week’s JGB sell-off and indirectly driving US Treasury yields higher. If there is any financial instrument more important than the stock market to the White House right now, it is US Treasuries. And b) the strong USD/JPY was potentially unwinding the work of US tariffs on Japan and giving Japanese manufacturers a competitive advantage.

However, this is not a fundamentally driven move. Yen real interest rates are still negative, and the snap Japanese election on 8 February could still see more pressure emerge on JGBs and the yen. And away from the geopolitical risk premium being attached to US assets, the dollar’s fundamental story has not deteriorated. Plus, we suspect this week’s FOMC meeting could prove slightly dollar bullish.

No doubt, Japanese and potentially US authorities, too, like this constructively ambiguous approach to FX intervention. Traders will be bracing for activity at both market opens and closes now. An upside gap in USD/JPY at 155.65 may now prove intraday resistance. But for the dollar sell-off to continue like this, we will probably need to see some poor domestic US news. Away from the FOMC, this will heighten scrutiny on earnings releases from US Big Tech this Wednesday and Thursday.

This yen intervention story has weighed heavily on DXY, where the prospect of up to $100bn of sales (that’s what Tokyo sold in summer 2024) has caught the dollar at a weak moment. DXY has an upside gap to 97.42 (now resistance) and has a bias to last year’s lows at 96.20/35 – but really needs some fundamental backing for these moves to sustain.

Chris Turner