By From the start of the week, the market had suspected a first intervention on the yen. But it was the intervention of May 1 that seemed decisive. It may have cost between 3,260 and 3,660 billion yen ($20.7 and $23.3 billion), according to BOJ data. Tactically, it's a pretty good move, say currency traders. "The markets were caught off guard because, obviously, this happened during the U.S. session and seemed to coincide with the reunion and the FOMC (Fed) press conference to take advantage of a weaker dollar", pointed out Kyle Rodda, senior financial markets analyst at Capital.com in Melbourne. It was a "sneaky" form of attack by Japanese authorities "seeking to punish speculators and send a warning about short-selling the yen".
Why is the yen structurally weak? Interest rates
Interest rates and momentum are powerful forces in the currency markets. Both factors work against the yen. The Bank of Japan kept Japanese short-term interest rates between 0 and 0.1% in April, and gave no indication of any major or sustained hikes ahead. As a result, the yen has become the G10 currency with the lowest rate or yield, and investors are borrowing it cheaply and selling it to buy higher-yielding currencies, driving down its price. These operations, known as carry trades, are particularly interesting when overall market volatility is relatively low, as is currently the case, as the fundamental difference in rates can influence the markets.
Momentum
Why is the yen falling? Because people are selling it. And why do people sell? Because it's falling. Such can be the self-fulfilling loop of market sentiment. The yen has been falling steadily for more than three years and has lost more than a third of its value since the start of 2021, and few are prepared to stand in its way. This trend discourages exporters from converting foreign earnings into yen. It encourages Japanese financial institutions to invest abroad. Last but not least, it has been a boon for speculators betting against the yen, who have been quick to act. Speculators' short positions in the yen reached their highest level since 2007 in the week ending April 23.
The outlook
Japan's central bank made a historic change by abandoning negative interest rates in March. But the decision was so well-publicized that it did not put any significant future hikes on the table, which reinforced investors' willingness to increase their short positions in the yen.
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