Spiking yen fuels risk-averse mood as investors take defensive stance

The sudden appreciation of the Japanese yen has intensified risk-off sentiment among investors, as concerns over elevated bond yields, policy uncertainty and credit risks in the world’s fifth-largest economy weigh on market confidence, according to analysts.

The yen rose to a two-month high on Monday, hitting 153.61 per US dollar as of 5.30pm as speculation surged that US and Japanese authorities could intervene to prop up the currency. It was last at a similar level on November 6, when it traded at 153.06 per dollar, according to Bloomberg data. As a result, the US dollar fell against most of its major peers on the day, while gold climbed above US$5,000 per ounce on its safe-haven status.

Media reports on Friday said that the New York Federal Reserve had checked dollar-yen rates with dealers – widely seen as a precursor to intervention. Traders scrambled to get out of short yen positions and carry trades, in which investors borrow a low-yield currency and reinvest in other currencies or assets with higher returns.

“A sharp yen jump is usually the market’s way of pulling the handbrake on risk”, signalling a carry unwind that “can spill into equities and high-beta [foreign exchange] through forced deleveraging”, said Charu Chanana, chief investment strategist at Saxo Markets.

“Risk sentiment can deteriorate even if the reason is technical. A stop-driven yen move tends to raise cross-asset volatility first, and that’s what makes investors defensive.”

On Monday, Japan’s finance minister, Satsuki Katayama, declined to comment on the rate checks, while top currency diplomat Atsushi Mimura said the government would maintain close coordination with the US on foreign exchange and act appropriately. Prime Minister Sanae Takaichi said on Sunday that her government would take “necessary steps” against speculative market moves, without referring to the yen.

The yen pressure builds on the volatility seen in Japanese government bonds (JGBs) last week, especially those with longer tenors, driven by concerns over potential tax cuts and higher spending ahead of the country’s election on February 8.