Based on an analysis of central bank accounts by Bloomberg, Japan may have spent approximately $53 billion on Thursday to intervene in the foreign exchange market, aiming to support the yen. The yen surged as much as 3.3% on Thursday, marking its largest intraday gain since December 2023. On Friday, the USD/JPY pair was trading around 160.

The Bank of Japan (BOJ) released its forecast for Monday's current account balance on Friday. The forecast indicated a decrease of 8.2 trillion yen due to fiscal factors, but the average forecast from Tokyo Tanshi, Central Tanshi, and Ueda Yagi Tanshi had originally expected an increase. Based on the BOJ's account data released Friday and a comparison between forecasts from money brokers, Bloomberg estimates that the Japanese authorities' operation size was approximately 8.45 trillion yen, equivalent to about $52.8 billion. While the exact figures remain unclear, the scale may have set a record for the largest single-day intervention by Japanese authorities.

The expanding scale of intervention demonstrates both the Japanese authorities' determination to stabilize the yen and the increasing difficulty of repelling yen bearish speculators. The BOJ's initial forecast of the current account balance is often considered the best indicator for estimating intervention size. The discrepancy between this forecast and the expectations of money brokers provided a basis for estimating the size of Thursday's operation. According to earlier reports from foreign media, a person familiar with the market said Japan did intervene on Thursday, and added that U.S. authorities conducted a currency review around 2:30 a.m. Tokyo time on Friday.

According to Reuters, markets are also speculating that Japan and South Korea may have coordinated market operations. Seoul authorities sold US dollars during the New York trading session, and the South Korean won rose to its highest level since mid-October in overnight trading. On Friday, Japanese officials declined to confirm whether intervention had occurred. Japan's top currency official, Atsushi Mimura, hinted that the Japanese authorities are gaining support from other countries, including the United States.

Thursday's action was the first time Japan intervened in the market since the start of the "Golden Week" holiday in late April. Previously, the Japanese authorities spent a record 11.73 trillion yen on intervention in a single month.

Why is the US Dollar Under Pressure?

The US dollar is heading for its worst week in three months. Besides being sold by Japanese and South Korean authorities, the market is also concerned that the Federal Reserve will not take sufficiently strong measures to curb inflation. The dollar index may fall by more than 1% this week. Although it recovered some ground on Friday, it is still hovering near its lowest level in over a month.

Rising U.S. Treasury yields usually support the dollar, but the current dollar decline reflects market concerns about the Fed's credibility. Fed Chair Jerome Powell is facing intense scrutiny, and his comments have sparked concerns that the Fed may delay rate hikes and allow inflation to run above its target. Long-term U.S. Treasury yields have now risen to their highest levels since 2007. The Japanese authorities' actions to support the yen have further increased downward pressure on the dollar.

Randhir Prakash, Managing Director at Gavekal Wealth Management, noted that the simultaneous decline in U.S. Treasuries and the dollar "feels very 'emerging market' in nature." He pointed out that investors are beginning to express dissatisfaction with the U.S. policy path, which "is bearish for both U.S. Treasuries and the dollar."

The Fed's decision to hold steady rather than raise rates is also partially supported by the latest economic data. Data released on Thursday showed that U.S. economic growth slowed in the second quarter, and the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, fell by 0.1% last month. On Friday, the swaps market still priced in 34 basis points of rate cuts by the U.S. this year, virtually unchanged from Thursday. Francesco Pesole, a foreign exchange strategist at ING Groep NV, stated, "We are still reluctant to declare that this dollar sell-off has bottomed. Any disappointing U.S. data could lead to a more aggressive dovish repricing than in the past."