By Jules Rimmer

Japan's finance ministry may look to exploit low trading volumes over the U.S. holiday to push its currency higher

The Japanese yen hit a 40-year low on Tuesday.

With the Japanese yen reaching a 40-year low on Tuesday, investors are eyeing when the country's authorities may stage an intervention to bolster its ailing currency.

One theory: on Friday, when U.S. investors will be celebrating the Fourth of July holiday.

This is the theory held by Chris Turner, ING's global head of markets and regional research. He speculated in a note to clients Tuesday that given Japan's record of getting involved when it feels it can have the maximum impact and "deliver a bigger bang for its intervention buck," it could wait until Friday's U.S. holiday when the U.S. stock market is shut and bank trading desks will be thinly covered.

Waiting until the end of the week would also allow Japan to avoid potential dollar-hawkish headlines coming from Federal Reserve Chair Kevin Warsh's speech on Wednesday and U.S. nonfarm payrolls data on Thursday.

The yen (USDJPY) is touching the 1986 lows triggered by the Plaza Accord signed a year earlier, when the U.S., Japan and Germany agreed to a policy of dollar devaluation to alleviate America's expanding trade deficit.

As Turner points out, Japanese authorities have made it clear that yen weakness poses a threat to import costs and the cost of living. The government has been addressing this problem through subsidies which, in turn, give bond markets even more concerns about excessive spending commitments.

Turner notes that the Band of Japan has $1.1 trillion of foreign exchange reserves and reckons that in the event of an intervention, it might limit the extent of its yen purchases to less than a third of that figure. Anything more than that could be viewed as reckless by currency traders.

In addition, if Japan were to intervene for more than three days, it might sacrifice the designation of the yen as a free-floating currency and be demoted to a floating currency by the International Monetary Fund. This would have implications for Japan's status as a reserve currency regime and for its creditworthiness.

Speculative positioning against the yen is not as high as it has been, which will make Ka[am#s hopes of forcing short-covering shorts harder to realize.

Authorities know that it can only slow the yen's relative decline, rather than reversing the long-term trend, Turner said. Even the very sharp rally it engineered in August 2024 only lasted a few weeks, and its task was made easier by the Federal Reserve's decision to start cutting rates not long afterwards.

Ultimately, interest-rate differentials are what pose the biggest obstacle to the yen's appreciation. The recent hawkish turn by the Fed's Warsh has accentuated that problem. As Udith Sikand and Tom Miller from Gavekal Research wrote in a note to clients Tuesday, the Bank of Japan remains behind the curve on inflation, hence its rapidly increasing bond yields BX:TMBMKJP-10Y.

Despite the bearish tone of Turner's note, his year-end forecast for the yen is still 158 to the dollar, around 2% higher than now. Forex options markets, Turner noted, price in a 37% probability of a decline to 165 by the end of July.

In Tuesday trading, the yen was trading at 162.38, having fallen 3.23% in the first half and 13% over the last year.

-Jules Rimmer

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