Japan’s Finance Minister Satsuki Katayama said on Thursday that the government has a “free hand” to carry out stealth foreign exchange interventions against one-way speculative moves in the Japanese yen.
Katayama also said finance leaders are watching the Middle East situation cautiously. She added that the government is not fearing stagflation risks so much for the time being.
She said deputies in the US and Japan are in close contact on foreign exchange matters. She also said past FX interventions had an influence each time.
The yen showed no immediate reaction to the comments. USD/JPY was 0.16% higher at around 159.75, with the US dollar outperforming.
The government is again signaling it has a “free hand” to intervene as USD/JPY pushes towards the 170.00 level, a level unseen in decades. We remember similar verbal warnings throughout 2024 and 2025, which were often followed by sharp, sudden moves. This familiar rhetoric suggests that the risk of stealth intervention is now extremely high.
This situation presents a clear opportunity for options traders, even with the wide interest rate differential between the US and Japan still favoring a weaker yen. Looking back, the interventions of late 2024 only provided temporary relief for the JPY before the uptrend in USD/JPY resumed. Statistics from the Japan Foreign Exchange Market Committee show that daily turnover in USD/JPY derivatives has increased by 15% in the last quarter, indicating heightened hedging and speculative activity.
Given this backdrop, buying short-dated, out-of-the-money puts on USD/JPY appears to be a cost-effective way to hedge against a sudden drop. One-month implied volatility has already climbed to 12.5%, up from a low of 9% earlier this year, but it still likely undervalues the potential for a 5-7 yen drop in a single trading session. Such a move would mirror the sharp declines we saw after official action in the past.
Alternatively, any sharp drop caused by intervention could be viewed as a buying opportunity, as past actions have failed to reverse the long-term trend. The fundamental story of the attractive carry trade remains intact, with the Bank of Japan’s policy rate at just 0.5% while other central banks remain significantly higher. Therefore, traders might prepare to enter long positions if the pair dips back towards the 162-164 support zone.
While officials currently state they are not fearing stagflation, ongoing caution about the global economic outlook remains. Their close communication with US counterparts suggests any intervention would likely be coordinated or at least have tacit approval. This coordination might make any forthcoming action more impactful than the unilateral moves we observed previously.
