(Bloomberg) -- The yen surged back from its weakest level against the dollar in 34 years amid speculation the Japanese government intervened to support its beleaguered currency for the first time since 2022.

In holiday-thinned trading in Japan, the yen swung wildly, rallying more than 2% on Monday after earlier dropping as much as 1.2% to 160.17 per dollar. That’s the widest trading range since late 2022. It held the gains during the New York session.

Analysts suggested the size and speed of the jump smacked of intervention, though Japan’s top currency official, Masato Kanda, chose to keep investors guessing by declining to comment. Dow Jones reported authorities stepped in to buy the yen, citing people familiar with the matter.

“The move has all the hallmarks of an actual BOJ intervention and what better time to do it,” said Tony Sycamore, market analyst at IG Australia in Sydney. A Japanese public holiday “means lower liquidity in dollar-yen and more bang for the BOJ’s buck.”

Whether the government was involved or not, the market is clearly nervous about the potential for intervention whenever the yen slides. The pressure on the currency has been stoked by the shifting interest-rate expectations in the US, where traders dialed back bets on easing, bolstering the dollar. That could build if Federal Reserve Chair Jerome Powell takes a hawkish tone after Wednesday’s policy-setting meeting.

“Today’s price action suggests it’s highly likely to be related to actual FX intervention,” wrote Nomura strategists Yujiro Goto, Yusuke Miyairi and Jin Moteki Monday, adding that “the BOJ’s dovish remarks last Friday and the widely expected ‘hawkish hold’ by the Fed at its May FOMC” could reduce the efficacy of any such move,” referring to the Bank of Japan. 

The yen has fallen some 10% versus the dollar this year, and before Monday’s rebound it was flirting with the lowest level since 1986. Officials have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast, with Finance Minister Shunichi Suzuki saying last week he was concerned about the impact of a dropping yen on inflation. A cheaper exchange rate makes imports of energy, food and other products more expensive, hitting consumers and companies.

“We cannot overlook the negative impact that excessive and abnormal FX fluctuations driven by speculation are having on the nation’s economy,” Kanda said on Monday. “So we will continue to take appropriate measures as necessary.”

Yen weakness complicates the delicate tightrope walked by officials in Japan, which is caught between decades of recent history marked by little to no inflation and the potential negative consequences of rising prices as it continues to keep rates well below those in other major economies. In that regard, the BOJ could be complicating the Ministry of Finance’s own steps on the yen, wrote Thierry Wizman, global FX & rates strategist at Macquarie.

“It was the BOJ’s decision to downplay the JPY’s impact on inflation after the BOJ policy meeting last Friday that prompted the rise in USD/JPY toward 158 on Friday, and then toward 160 in the early hours of the session overnight, amid thin liquidity due to the Japanese holiday,” Wizman wrote Monday. 

Inflation Mindset Taking Root in Japan Boosts Case for BOJ Hikes 

Yet, interventions in the currency market don’t alter the gulf in interest rates between the US and Japan that’s been weighing on the yen. Others have argued that a weaker foreign-exchange rate is not necessarily that bad for Japan because it can aid economic growth by driving up exports and tourism while also lifting the value of overseas assets held by local investors.

Kyle Rodda, a strategist at Capital.com in Melbourne, called trading “pretty wild” as investors hurried to cover short positions and speculative traders sought to benefit from the swings.

At CME Group, Monday was the most active session of the year for dollar-yen trading. Some $98 billion in notional volume was exchanged in the pair, including over $68 billion in spot and $30 billion in futures, CME said. 

Fed Risk

The US central bank is scheduled to hold a monetary-policy meeting during which it may signal the need to keep interest rates elevated amid sticky inflation — a move that would likely support the dollar and put renewed downward pressure on the yen.

“Should there be no intervention, it would be dangerous to catch a falling knife, particularly with the Fed likely to signal a longer wait for cuts,” said Fiona Lim, senior strategist at Malayan Banking Bhd. “Momentum is definitely there for dollar-yen to move decisively above the 160 and markets are testing Japan’s tolerance for a sharp yen decline.”

The Bank of Japan last week indicated financial conditions will remain easy, though policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast. 

Earlier this month, the nation’s finance minister also flagged concerns over the yen’s decline to US Treasury Secretary Janet Yellen, which market participants saw as laying the groundwork for intervention. A US Treasury spokesperson declined to comment Monday.

Japan’s Kanda has given an example of a 10-yen move over one month as a rapid one. Japan’s currency has weakened by as much as 8 yen per dollar over the last month, but it fell over 2% last week alone.

While the BOJ has brought local rates out of negative territory, they are still far from levels that would tempt investors from the higher yields on offer in the US and other countries.

“The current pace of depreciation is less than in 2022 so the intervention response could be less intense,” wrote Vincent Chung, associate portfolio manager at T. Rowe Price. “Additionally, market participants have priced in the possibility of intervention by authorities following the BoJ meeting in May, as indicated by option pricing.”

Yen Watchers Ask When Japan Will Step In as Slide Accelerates

Bets in the options market helped to exacerbate the yen’s drop on Monday, with barriers against the dollar and euro being targeted on the view intervention risks were likely low during a Japanese holiday, according to Asia-based traders. Against the euro, the yen on Monday fell beyond 170 to the weakest since the creation of the common currency, before recovering ground.

“Pressures will remain on the currency until we get more downbeat growth and inflation data in the US and clearer hawkish shift at the BOJ,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore. 

--With assistance from Carter Johnson, Christopher Condon, Alice Atkins, William Selway, Michael G. Wilson, Matthew Burgess, Erica Yokoyama, Emi Urabe, Neil Chatterjee and Vassilis Karamanis.

(Adds Treasury request for comment, Nomura and Macquarie comments, CME volumes.)

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