FX.co ★ Japanese yen surges amid some reasons

The USD/JPY pair plunged from a peak of 159.00 reached last week to about 154.00 during today's Asian session. Demand for the yen jumped after Japan's prime minister, Sanae Takaichi, issued a forceful warning to financial markets about the possibility of intervention amid yen weakness and a sharp rise in bond yields, saying the government stood ready to act.

"I won't comment on specific market moves. The government will take necessary steps against speculative or very abnormal market moves," Takaichi said on Sunday during televised party?leader debates. She did not specify whether her remarks referred to Japanese government bond yields or the currency.

The prime minister's statement came as a shock to currency traders used to more cautious rhetoric from Japanese authorities, who have tended to prioritize stimulus for the economy over concern about exchange rates. That direct language, combined with a pledge to "take necessary steps," led markets to take seriously the prospect of Bank of Japan intervention to support the yen.

Against a backdrop of global economic instability and a stronger dollar, the yen had been under pressure for some time, prompting Japanese officials to worry about higher inflation and negative effects on the economy. Takaichi's comments, though lacking detail, were viewed as a warning to speculators and a demonstration of the government's resolve to defend the currency.

Markets are now waiting for further action from the Bank of Japan. Last week, the central bank left policy rates unchanged while keeping open the option of future tightening.

In recent weeks, government officials have issued repeated worrying signals about both markets. Speculation has mounted that Japanese authorities may be preparing to intervene in currency markets to stop the yen's fall, possibly with rare assistance from the United States. On Friday, there were reports that the Federal Reserve Bank of New York had contacted Japanese financial institutions to ask about the yen's level. Wall Street interpreted those inquiries as a potential precursor to intervention by Japan, possibly with US government involvement.

Friday's yen strength also ended a slide that in 2024 prompted Japanese authorities to intervene to buy their currency. The interventions in 2024 came when the exchange rate exceeded about 160 yen to the dollar. In 2024, the government spent nearly $100 billion buying yen to support the exchange rate. In each of the four episodes, the exchange rate hovered around 160 yen per dollar, which market participants now view as an approximate trigger level for further measures.

Japan is preparing for a snap election on 8 February, and Takaichi's pledge to cut food taxes last week shocked the Japanese bond market. Yields on the longest?dated government bonds spiked to record levels early in the week before retreating.

A technical outlook for USD/JPY suggests that buyers should reclaim the nearest resistance at 154.40. That would allow a move toward 154.90, above which a breakthrough would be difficult. The extended target is the area around 155.35. On a decline, bears will try to seize control at 154.00. If they succeed, a break of that range would deal a serious blow to bullish positions and push USD/JPY down to 153.70, with scope to drop to 153.40.