(Bloomberg): Traders are bracing for a surge in volatility as the yen tumbles to the low 160 yen range against the dollar, its lowest level in nearly 38 years, raising the possibility of currency intervention.

While the yen’s implied volatility appears to be calmer than it was at one point, its spread against the nine major currencies remains above its average since 2021, suggesting that there is a premium for taking on yen fluctuation risk in the foreign exchange market.

Yukio Ishizuki, senior foreign exchange strategist at Daiwa Securities, pointed out that having broken through the 1990 low of 160.20 yen, there has been no turning point for a while, making it “prone to accelerated yen depreciation.” Hideki Shibata, senior interest rate and foreign exchange strategist at Tokai Tokyo Intelligence Lab, warned that intervention is expected when the yen accelerates its depreciation, which “will cause a sudden rise in volatility.”

Hedge funds and asset managers had short yen positions worth $14 billion as of Wednesday, according to data from the Commodity Futures Trading Commission, more than any other major currency, signaling bearishness against the yen.

Speculators are betting the yen will weaken and warnings from Japan’s monetary authorities are unlikely to stop it from weakening further, Carol Conn, currency strategist at Commonwealth Bank of Australia, wrote in a note. “There is a risk that threats of intervention will come true.”

On the night of the 26th, after the yen hit its lowest price in about 38 years, Masato Kanda, the Finance Ministry’s vice minister, stated that “recent exchange rate movements are in one direction” and that “we will take necessary measures against excessive movements,” indicating that he would not hesitate to intervene in the exchange rate. However, the market’s reaction to the warning remarks was temporary, and the yen’s depreciation has not been halted.

The yen FX Pain Index, which estimates investor positions calculated by Citigroup, fell to its lowest level since February 2022. It indicates that yen short positions by active traders such as funds are piling up. These positions are at risk of being unwound by the authorities’ intervention to buy yen.

However, the effects of the interventions at the end of April and beginning of May, in which about 10 trillion yen was invested, disappeared in less than two months. Even if the intervention is carried out again and the yen rises, individual investors and others will be waiting to seize the opportunity to resell yen.

“Individual investors are trying to make a second bid,” said Shibata of Tokai Tokyo Intelligence Lab. “Intervention may temporarily halt the yen’s depreciation, but it won’t change the yen-selling trend.”

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