Yen Intervention Fears Rise Ahead of BOJ Meeting, Japan Holiday

With the Bank of Japan's September policy meeting and the holiday stretch that follows approaching, traders are growing more wary that Japanese authorities may step in again to buy the yen.

Bloomberg reported on September 3 that the yen strengthened as much as 0.7% to 157.63 per dollar. It had already climbed as much as 1.2% intraday in New York trading a day earlier. Markets have all but locked in a BOJ rate increase on September 18, and some traders have started to price in the possibility of a move larger than 25 basis points.

Particular attention is on Japan's Silver Week holiday, which comes right after the BOJ meeting. Thinner trading during the break could let authorities move the exchange rate more with less money. Japan used a long holiday period in April to intervene in the foreign-exchange market for the first time in 2024, fueling speculation that officials could adopt a similar strategy again.

"The first thing every trading desk will ask whenever prices move sharply is, 'Is it intervention?'" Bart Wakabayashi, Tokyo branch manager at State Street Bank, said. "The market will continue to remain very sensitive and unstable."

The yen has stayed under pressure despite large-scale market intervention by Japanese authorities, with higher crude prices and a wide interest-rate gap with the US weighing on the currency. Japan deployed a record $96.4 billion over the past month to defend the yen, and the US also joined the intervention effort. Japanese Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent have said they are ready to step back into the market without hesitation if needed.

Speculative money is also returning to bets on yen weakness. Hedge funds sharply reduced yen short positions immediately after the earlier intervention, but have recently started building those bearish positions again.

The BOJ's rate decision is another key driver of volatility. After Bessent publicly stressed the need for additional rate increases in Japan, some investors fear the yen could slide sharply if the BOJ delivers less tightening than markets expect.

BOJ board member Hajime Takata said on September 2 that a 25-basis-point increase is not predetermined. He also said back-to-back rate hikes are possible, prompting talk that the BOJ could tighten more aggressively than expected.

The Federal Reserve's policy meeting, which comes before the BOJ decision, is also set to influence the yen's direction. Fed Chair Kevin Warsh recently struck a hawkish tone in his Jackson Hole speech, saying the slowdown in inflation was not sufficient and that additional policy action could be needed if officials are not confident about price stability.

Marito Ueda, president of SBI FX Trade, said the market is watching closely for possible foreign-exchange intervention ahead of the Fed and BOJ meetings and Japan's extended holiday. If the dollar-yen exchange rate reaches the 160 level, the chance of intervention would be high, he added.