After the largest increase since the coordinated intervention, JP Morgan warns that a fall below 155 could trigger a chain sell-off, and the USD/JPY may plummet to the 142-146 range.

After experiencing a gradual decline for about a month, the Japanese yen suddenly strengthened significantly on Thursday, rising nearly 2% in a single day, marking its largest single-day gain since the coordinated intervention in the forex market by Japan and the U.S. at the end of July. The USD/JPY pair quickly retraced from a high of 160.39 reached earlier that week, dropping to around 155.30, just a step away from the low of 155.23 following the intervention in July. This rapid rebound has drawn considerable market attention. JP Morgan strategists have warned that if the USD/JPY falls below the 155 mark, the large short positions on the yen may be forced to unwind quickly, triggering a chain of sell-offs that would push the yen up more than the market currently anticipates. According to a report from JP Morgan strategists, including Junya Tanase, there are still about 16 trillion to 17 trillion yen (approximately $102.6 billion) of short yen positions that have yet to be closed. The report indicates that if the USD/JPY drops below 155, "the risk of additional selling triggering further selling, and thereby pushing the yen's appreciation beyond expectations, cannot be ruled out." JP Morgan estimates that if these short positions are fully unwound, it could theoretically push the USD/JPY into the range of 142 to 146. "The recent price movements seem to confirm our view that a relatively large number of short positions on the yen may still exist in the market," the bank wrote in a report. However, JP Morgan also emphasized that the current expectations regarding adjustments to the asset allocation of Japan's Government Pension Investment Fund (GPIF) and a faster rate hike from the Bank of Japan seem "somewhat excessive," thus the probability of the USD/JPY significantly breaking below the assumed range of 155-165 in the short term is low. Multiple Catalysts Combine to Boost the Rebound The yen experienced a strong rebound on Thursday driven by multiple catalysts. First is speculation regarding GPIF asset allocation. There are rumors that Japan's largest pension fund may increase its allocation target for domestic bonds, which some investors interpret as favorable for yen demand. Although GPIF has not officially confirmed such adjustments, these expectations have already begun to gain traction in the market. Secondly, expectations regarding a rate hike by the Bank of Japan are heating up quickly. Bank of Japan board member Takata Soichiro stated on Wednesday that a 25 basis point hike is "not set in stone" and that consecutive rate hikes are generally possible. This statement has strengthened investor speculation that the Bank of Japan may adopt a more aggressive tightening stance. The swap market is currently pricing in almost complete certainty that the Bank of Japan will raise rates by 25 basis points at its policy meeting on September 18, with an approximately 80% probability of another hike in December. Thirdly, dovish remarks from Federal Reserve Governor Christopher Waller about inflation developments have weakened the dollar. Waller's comments have reduced the market's expectations for further large rate hikes from the Federal Reserve, and the dollar index fell 0.6% that day, reaching its lowest level since May. Expectations of narrowing interest rate differentials between Japan and the U.S. have further supported the yen. Additionally, the unwinding of short positions and domestic hedging demand from Japanese investors have amplified the gains. Wells Fargo's chief strategist for the Asia-Pacific region, Chidu Narayanan, indicated that Thursday's rise may have been magnified by short covering from speculative yen shorts and domestic hedging demand; however, he noted that these fund flows alone are unlikely to push the yen significantly higher. He believes that for the yen to see a notable rebound beyond current levels, it would require unexpected hawkishness from the Bank of Japan, fiscal prudence from Tokyo, and a general weakening of the dollar. It is understood that the yen's previous persistent weakness had previously forced Japanese authorities to intervene in the forex market in coordination with the U.S. at the end of July, leading to a record $96.4 billion spent to support the yen over the past month. While the intervention temporarily halted the yen's decline, there are ongoing doubts about its long-term effectiveness. Earlier this week, the USD/JPY broke back above 160, putting the effectiveness of the intervention to the test. As the yen approaches key levels again, the tone of Japanese officials has noticeably hardened. Japan's top foreign exchange official, Akinori Mitsumura, stated to reporters that he is not satisfied with the current state of the yen and vowed to "continue to fight in the forex market." This statement is more forceful than his recent remarks. Nomura's international forex strategist Yusuke Miyairi pointed out that Mitsumura's wording is significant as market tensions regarding intervention risks have been rising. "In this environment, the probability of the USD/JPY testing 160 has decreased, and it is more likely to remain around the lower end of the 155-160 range," Miyairi stated. Currently, the market remains vigilant about the possibility that Japanese authorities may intervene again during the upcoming "Silver Week" holiday. Earlier this April, Japanese authorities chose to intervene during the long holiday, leading investors to speculate that they might adopt a similar strategy. The Silver Week holiday will begin shortly after the Bank of Japan's policy meeting. However, the latest data from the Bank of Japan indicates that there were no signs of large-scale interventions by Japanese authorities on Wednesday. Nevertheless, traders remain highly alert. Bart Wakabayashi, manager of the Tokyo branch of State Street Bank, stated, "After any extreme volatility, the first reaction on any trading desk is, 'Is this intervention?' As we saw last night, I believe the market will continue to remain very sensitive and tense." U.S. Treasury Secretary Pressures Japan to Raise Rates, Policy Meeting Becomes Focus Following the yen's surge, the market's focus has shifted to the Bank of Japan's policy meeting on September 18. U.S. Treasury Secretary Scott Basset has recently intensified his public pressure on Japan to raise interest rates. If the Bank of Japan fails to meet Basset's almost unabashed calls for a rate hike, it could not only surprise traders but may also trigger a renewed depreciation of the yen. Pioneer Investments strategist Paresh Upadhyaya believes, "It seems the Bank of Japan is poised to pull the trigger on a rate hike in September and may open the door for an accelerated pace of hikes thereafter. We are finally seeing some meaningful follow-through on the policy expectation front to align with previous intervention actions." However, some analysts are cautious about whether the yen can sustain its strength. Hideaki Minami, head of the foreign exchange cash trading team at Mizuho Bank, noted that the yen buying pressure is likely primarily coming from foreign investors speculating about a significant rate hike, but "it is still too early to conclude that the yen's depreciation trend has reversed based on today's movements."