The financial world was taken aback on April 29 when the Japanese yen exhibited remarkable volatility that sent ripples through global trading markets. Last week, the Bank of Japan (BoJ) didn't meet hawkish expectations during its monetary policy meeting, which sent yen bears on the offensive, driving the US dollar against the yen up by 2.3%, breaching the 158 mark and hitting a peak of around 160 during morning trade. This level marked the highest the yen had been since April 1990, only to later plunge back to around 156.

Although Monday was a public holiday in Japan, some analysts speculated that the BoJ might soon intervene in the currency markets, a claim that remains unsubstantiated. In March, the central bank had raised interest rates by 25 basis points for the first time, officially moving away from its zero interest rate policy. However, this step did little to arrest the yen's decline. Over the past three months, the yen has depreciated by 6% against the dollar, with a staggering annual decline nearing 17%. Notably, even against the recently weak Chinese yuan, the yen has lost almost 8% this year, with over 4% of that occurring in the last three months.

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Many Chinese investors and those studying or traveling in Japan expressed their confusion about the currency's weakening, despite their earlier bets on a potential rise in the yen due to anticipated interest rate hikes. Taking a gamble, some even stockpiled millions, if not tens of millions, of yen, only to be bewildered by the current depreciation. Additionally, the absence of any interest return on deposits in yen significantly increased the opportunity cost when compared to holding dollar deposits.

Traders from foreign banks indicated that Monday’s sell-off seemed to push the Bank of Japan towards potential intervention, as traders were becoming increasingly frustrated with the BoJ's inaction in the face of yen depreciation. Recent data released by the Commodity Futures Trading Commission showed that, as of April 23, speculative short positions on the yen reached an all-time high. With the current currency spikes and subsequent drops, market players are left wondering if the extreme sentiment could reverse.

At one point, the dollar even broke through the 160 mark against the yen. Within a currency trading discussion group, the mood among yen hoarders was understandably grim.

One individual, who asked to remain anonymous and went by the pseudonym Ms. Wang, revealed her strategy. “I thought the yen would surge after the interest rate hike, so I bought 50 million yen at the beginning of this year,” she explained. Another trader, Ms. Liu, shared her own experience, stating, “I only bought 6 million yen last year at a cost of 5 yuan for 100 yen. Now, it has fallen to around 4.6.” She had assumed that with anticipated U.S. interest rate cuts, it would be wise to utilize her currency exchange quota on the yen.

Mr. Liu, another trader, discussed his attempts to time the market. “I thought I was getting a good deal at various points, buying 100 million yen at rates of 4.84 and 4.74, but now I'm too hesitant to buy more,” he confessed.

The surge and subsequent fall of the yen on April 29 reached a zenith of anxiety among these traders. During the morning session, the dollar/yen exchange rate crossed above 160—an increase of more than 1%—which marked the highest level since 1990. Analyst David Scutt from a forex consultancy noted that this rise was not due to the increasing spread between Japanese and U.S. treasury yields, as the U.S. bond market was closed due to the Japanese public holiday. Instead, he attributed the spike to speculative forces and suggested that it might prompt the Japanese government to instruct the BoJ to intervene.

In March, the depreciation of the yen was relatively controlled as traders believed that breaching levels of 150 or 152 would trigger intervention from the BoJ. However, as the dollar gained strength, pushing the yen’s value downward like an uncontrollable beast, the bearish sentiment intensified, resulting in the dollar/yen pair reaching the transformative 160 mark.

One contributing factor to the yen's decline has been the apparent tolerance of the BoJ. Scutt pointed out that the “intervention threshold has shifted dramatically.” If the yen's depreciation accelerates further, it may force authorities to take additional measures. The Japanese government has openly expressed its concerns regarding the ongoing weak yen, fearing that sustained depreciation could lead to increased inflation and adversely affect trade conditions. The weaker currency makes exports cheaper but increases the costs of imports, complicating economic dynamics.

Just last week, the BoJ opted to keep rates unchanged while maintaining its monthly treasury purchase levels at status quo. Questions from journalists focused on the implications of yen depreciation for monetary policy, to which the BoJ Governor Kazuo Ueda responded as though there was no immediate need to adjust policy based on currency fluctuations. He emphasized that trends in core inflation should take precedence, suggesting that it would only become a monetary policy issue once the yen’s value began to significantly impact core inflation metrics. This response reignited bearish sentiment towards the yen.

As the market anticipates Thursday’s Federal Reserve meeting and crucial economic indicators, many analysts expect volatility in dollar/yen rates to rise sharply, with forecasts suggesting a potential range of 154.873 to 161.737. Traders are eyeing support levels around 154.4 to 155, but should prices exceed 160 again, the next resistance level may be marked at 165.

As the dollar/yen approached 160 before wavering back to around 156, the market speculated whether the BoJ had indeed stepped back in. That same afternoon, Japan’s Deputy Finance Minister Masato Kanda refrained from commenting on the possibility of currency intervention but did acknowledge that appropriate measures would be taken to address excessive currency fluctuations, with further announcements expected by the end of May.

In light of inquiries regarding potential BoJ interventions, U.S. Treasury Secretary Janet Yellen remarked that for nations where “market forces determine currency valuations,” intervention should only occur in rare circumstances. She expressed hope that such moves would be infrequent, only occurring amid considerable volatility, and that prior consultations would take place.

As the financial developments unfolded, Trader Scutt noted that signs of potential BoJ intervention were visible as soon as April 26, when the dollar/yen neared 157. Adjustments in the market indicated that any such intervention would need careful observation, with market players keen to discern its effectiveness in reversing the yen's downward trajectory.

Contrary to the notion of active intervention, there are views suggesting that the BoJ has been content with the depreciation, seeking only to regulate the pace rather than reverse it. A trader at a foreign banking institution shared his thoughts, stating, “The central bank appears intent on controlling the speed of depreciation without aiming to turn it around since this depreciation is advantageous for exports in industries such as semiconductors and automobiles.”

The impact of the current regime of significant U.S.-Japan interest rate differentials remains a major concern, showing little indication of change in the short term. Currently, U.S. deposit rates stand near 5%, a stark contrast to the negligible rates on yen savings, with the spread between U.S. and Japanese ten-year treasury yields nearing 4 percentage points. This situation effectively means that even if the yen doesn't appreciate, yen bulls face a near 5% loss in interest merely by holding the yen.

Shigeto Nagai, head of Japan’s economic research at Oxford Economics, predicted that the next potential interest rate hike might not materialize until the latter half of 2024, noting that any increases would be scrutinized very cautiously. Projections suggest it could take until 2028 for the BoJ to carefully elevate policy rates to 1%, indicating limited upward movement in interest rates which makes it difficult for the yen to strengthen.

This week’s critical U.S. economic events and data releases will be pivotal for the yen. The Federal Reserve is set to announce its interest rate decision on Thursday, May 2, at 2 am Beijing time, amid reports of sticky inflation and a rebound in commodity prices which could complicate matters further.

There is speculation that Fed Chair Jerome Powell may emphasize maintaining elevated rates for an extended period, despite potentially pausing further actions. Focus also lies on whether the taper pace will slow down. Overall, the outlook on interest rates combined with risk-averse sentiment is likely to bolster the dollar’s strength.

Furthermore, the U.S. labor report for April will be released on Friday, May 3, at 8:30 pm. March witnessed an increase of over 303,000 jobs—the largest surge in nearly a year—with a slight dip in unemployment from 3.9% to 3.8%, and hourly wage growth slowing to 4.1% year-on-year. The upcoming report anticipates an addition of 243,000 jobs with the unemployment rate holding steady at 3.8%. Stronger-than-expected data could exert additional downward pressure on this year's interest rate cut expectations, further favoring the dollar.

Before the non-farm payroll figures are released, the week will also see a slew of employment market data, including job vacancies and ADP employment changes. Additional economic reports on ISM manufacturing and services PMI are set for release as well.