By Leika Kihara TOKYO, Feb 12 (Reuters) - Japanese Prime Minister Sanae Takaichi's landslide election win has given fresh impetus to her economic stimulus agenda but the risk of destabilising yen declines remains one firm check on her push for low interest rates. The emphatic victory last weekend has emboldened her mandate to boost investment and lower taxes to rev up the economy, all ‌of which could heighten the hurdle for the Bank of Japan to further raise borrowing costs. The dovish premier may als ...

By Makiko Yamazaki and Leika Kihara TOKYO, Jan 29 (Reuters) - Japan's top monetary officials are leveraging rare U.S. backing in their fight against the weak yen, using tactical silence and calibrated communication to drive the currency sharply higher without resorting to large-scale intervention. At the heart of the approach is ​Atsushi Mimura, Japan's top currency diplomat, whose sparse public remarks have become policy signals in their own right. Rather than offering frequent colour on the currency ...

Core Viewpoint - The foreign exchange markets are on alert for potential official yen buying due to a recent spike in the currency and a commitment from Japanese Prime Minister Sanae Takaichi to counter speculative market movements [1][4]. Group 1: Yen Movement and Market Reactions - The yen experienced its sharpest rise in nearly six months, closing at 155.73 per dollar, following a decline towards 160, which is perceived as a threshold for potential intervention [2][5]. - The New York Federal Reserve's rate checks were interpreted by traders as a signal for possible joint U.S.-Japan intervention to stabilize the yen [2][4]. - The yen's recent volatility has made short sellers anxious, as any intervention could lead to significant losses for them [2] Group 2: Economic Implications - The depreciation of the yen has raised import costs and inflation, negatively impacting household purchasing power in Japan [5]. - Since Takaichi assumed leadership of Japan's ruling party, the yen has depreciated over 5% against the dollar, coinciding with rising bond yields due to concerns over increased government borrowing [5]. - The yen recently hit record lows against the euro and Swiss franc, but there is speculation that it could rally if U.S.-Japan buying is anticipated [6]. Group 3: Government Stance and Future Actions - Japanese officials, including Finance Minister Satsuki Katayama, have expressed concerns regarding the yen's "one-sided depreciation" and its economic repercussions [7]. - Takaichi's statement about taking necessary steps against abnormal market movements indicates a proactive approach from the government to manage currency fluctuations [4].

Core Viewpoint - Traders are on high alert for potential Japanese government intervention to stabilize the yen, with possible support from the US, as Prime Minister Sanae Takaichi indicated readiness to act against abnormal currency movements [1][4]. Group 1: Speculation of Intervention - Speculation regarding intervention has intensified after reports that the Federal Reserve Bank of New York contacted financial institutions about the yen's exchange rate [2]. - Michael Brown from Pepperstone Group noted that rate checks are often a precursor to intervention, suggesting the current administration has a lower tolerance for speculative foreign exchange moves compared to previous ones [3]. Group 2: Market Reactions - The yen experienced significant volatility, reversing a downward trend and gaining as much as 1.75% to 155.63 against the dollar, marking its largest one-day rally since August [3]. - Traders are advised to be cautious as the yen may trade near 155 against the dollar at the start of the week, following Takaichi's comments [5]. Group 3: Government Stance - Takaichi emphasized the government's commitment to address speculative and abnormal market movements, although she refrained from commenting on specific market conditions [4]. - Recent warnings from government officials have also included concerns about rising bond yields, which had reached record levels before retreating [5].

Core Viewpoint - The Commonwealth Bank of Australia (CBA) anticipates significant fluctuations in the value of the Japanese yen against both the U.S. dollar and the Australian dollar this week [1] Group 1 - CBA has indicated that there could be large swings in the yen's value [1]

Currency Movement - The yen has fallen to its weakest level in 18 months, reaching 159.05 per dollar, a decline of up to 0.6% [2][3] - The depreciation of the yen is attributed to political developments, including Prime Minister Sanae Takaichi's intention to call a snap election, reviving the "Takaichi trade" [2] Government Response - Japanese Finance Minister Satsuki Katayama expressed concerns about the yen's one-way weakening during a meeting with US Treasury Secretary Scott Bessent, who shares these concerns [3][4] - There is speculation that the meeting may lead to potential currency intervention, as both nations will maintain close communication regarding currency developments [4][5] Market Reactions - The weaker yen is expected to benefit Japan's largest exporters, contributing to a record high in the stock index [6] - However, the broader business community, represented by Keidanren, is increasingly worried about the yen's decline and calls for an adjustment towards a stronger yen [6][7] Intervention Considerations - The risk of currency intervention is being highlighted, with the yen at 160 against the dollar seen as a critical threshold for potential action [5][7] - Historical context indicates that Japanese authorities intervened in the market four times in 2024 when the yen traded around 160, suggesting a reference point for future interventions [7]

Market Sentiment - Current market sentiment is fragile, with recent sell-offs in Bitcoin, gold, and NASDAQ indicating a shift from previous optimism surrounding AI investments [3][9][21] - The likelihood of a near-term rate cut has increased significantly, which may provide a boost to the market if confirmed [8][9] Cryptocurrency Insights - Bitcoin and other cryptocurrencies are experiencing volatility, with significant sell-offs leading to concerns about market liquidity and leverage positions [5][20] - The current state of Bitcoin is described as oversold, presenting potential buying opportunities for investors [21][22] Geopolitical Factors - Increased military presence around Venezuela and actions against Russian tankers could impact oil markets, potentially leading to higher oil prices [15][17] - Geopolitical tensions are seen as a macro factor that could influence market dynamics, particularly in the oil sector [16][17] Currency and Economic Policy - Japan's recent economic stimulus of 135 billion could affect the yen carry trade, which has implications for global markets [10][12][14] - The dollar is approaching a six-month high, which may influence investor behavior and market trends [10]

Core Insights - The Swiss franc has reached a 10-year high against the euro, driven by expectations of persistent inflation and potential reductions in US tariffs, leading to increased demand for the currency [1][3] - The franc's rise is supported by comments from the Swiss National Bank (SNB) indicating a slight increase in inflation, which has reduced speculation about a return to negative interest rates [2] - Hedge funds are positioning for further appreciation of the franc, particularly against the euro and yen, as December is historically a strong month for the currency [4] Currency Performance - The Swiss franc increased by 0.4% to 0.91862 per euro, marking its strongest level since January 2015 [1] - The current upward trend is on track for a seventh consecutive daily gain, the longest winning streak since August 2024 [1] Market Sentiment - Money markets have decreased the probability of negative interest rates to less than 30%, down from approximately 64% a month ago, reflecting a shift in market sentiment [2] - Reports of Switzerland nearing a 15% tariff reduction on exports to the US have further bolstered the franc [3] Hedge Fund Activity - Hedge funds are increasingly betting on the strength of the franc against the euro and yen, indicating a bullish sentiment in the market [4] - There is a potential for long positions against the US dollar as well, given the historical performance of the franc in December [4]

Core Viewpoint - Traders are skeptical about Japan's new government's ability to stabilize the yen through direct intervention as the currency approaches levels that previously prompted market actions [1][2]. Group 1: Government Intervention - Unlike last year, the current intervention would occur as Prime Minister Sanae Takaichi signals a desire for a slowdown in interest rate hikes, which contrasts with previous interventions that were in anticipation of higher rates [1][3]. - Any intervention risks depleting Japan's foreign exchange reserves, which are necessary for funding a US investment package aimed at appeasing President Donald Trump [2]. Group 2: Currency Performance - The yen has depreciated approximately 4.5% against the dollar this quarter, marking the most significant decline among its Group of 10 peers, with a low of 155.04 during the US session on Wednesday and trading around 154.96 in Tokyo [3]. - The Ministry of Finance intervened last year when the yen fell to about 160.17, with additional interventions at levels around 157.99, 161.76, and 159.45, indicating a focus on volatility rather than specific exchange levels [4][5]. Group 3: Market Sentiment - Finance Minister Satsuki Katayama expressed concerns about one-sided and rapid currency moves, acknowledging the negative aspects of a weak yen [4]. - If the fear of intervention fails to prevent the yen from breaking below 155 per US dollar, the likelihood of intervention is expected to increase [6]. - There is no strict definition of overly sharp moves, but a previous indication suggested that a 10-yen move against the dollar over a month or a 4% move in two weeks would be considered rapid [7].

Economic Outlook - The Australian dollar rose by 0.3% to $0.6504, buoyed by positive economic data from China and a more optimistic trade outlook [1][4] - China's economy grew by 1.1% in Q3, surpassing forecasts, with industrial output increasing by 6.5%, although the annual growth rate of 4.8% was the weakest in a year [2][3] - Analysts suggest that China is on track to meet its growth target of around 5%, indicating resilience against U.S. tariffs [3] Political Developments - The yen weakened initially as Sanae Takaichi appeared set to become Japan's next prime minister, following crucial political backing [1] - Takaichi's bid for premiership was bolstered by an alliance with the Japan Innovation Party, aligning more closely with her policy views after a previous coalition breakup [5][6] - The market is reacting positively to the potential for Takaichi's leadership, leading to bullish equities and bearish sentiment towards the yen [5] Market Sentiment - Market analysts indicate a sense of "mutually assured destruction" regarding U.S.-China trade tensions, with both sides acknowledging the risks of escalating tariffs [4] - There is a prevailing sentiment that markets will remain jittery until explicit announcements of de-escalation are made [5]