Analysis-Yen intervention looms large, but it may not work

Core Viewpoint - Japan is on the verge of intervening in the currency market for the third time in recent years due to a persistently weak yen, but analysts believe such intervention may be ineffective and could lead to further selloffs [1][4]. Currency Market Situation - The yen has reached a 10-month low, declining alongside bonds since Sanae Takaichi assumed leadership of Japan's ruling party, with proposals for increased government spending [2]. - Japan's cabinet has approved a stimulus package worth 21.3 trillion yen ($135 billion), and Finance Minister Satsuki Katayama has issued warnings about potential yen intervention if market movements become disorderly [3]. Intervention Expectations - Analysts anticipate that the government may issue verbal warnings before actual intervention occurs, likely around the 158-162 yen per dollar range [3]. - Previous interventions in 2022 and mid-2024 were successful in strengthening the yen, but current conditions may make similar outcomes more challenging due to a lack of significant short positions against the yen [4]. Market Reactions - Initial intervention could lead to increased short positions, resulting in more selling pressure on the yen shortly after the intervention [5]. - The current exchange rate is at 156.7 yen per dollar, approaching a critical level of 160 yen, which could trigger significant market reactions if no intervention occurs [6]. Speculation and Market Sentiment - Traders recall the intervention levels from the previous year, around 157 to 162 yen, and if no action is taken as the yen nears 160, speculation about a weaker intervention stance may lead to aggressive selling of the yen [7].