Traders Prepare for Sharp Yen Volatility Amid BOJ Intervention Concerns

Yen Swings Prompt Traders to Hedge Against Sharp Moves

Options traders are increasing their hedges against sharp yen swings over the next two weeks, positioning for the Bank of Japan's policy meeting and the possibility of currency intervention by authorities seeking to support the yen. Two-week dollar-yen butterfly spreads have risen to their highest since October 2022, around when Japan conducted its first yen-buying intervention in more than two decades to stem the currency's decline. The widening spreads point to growing worries over large swings in the currency pair.

The yen remains under pressure despite Japan's record spending to support it from April 28 to May 27, fueling speculation that authorities may step back into the market. Investors are also focused on the BOJ's June 15-16 meeting for clues on the central bank's policy path as the wide interest-rate differential between the US and Japan continues to weigh on the yen.

Japan's currency strengthened to as far as 159.61 on Thursday, and government bond futures fell after people familiar with the matter said BOJ officials are set to consider a quarter percentage point increase to the benchmark interest rate this month and see the possibility of a further rate hike later this year. BOJ Governor Kazuo Ueda said on Wednesday that the central bank needs to keep raising interest rates in response to developments in the economy and inflation. Overnight index swaps show about a 94% chance of a move in June by the BOJ.

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Strategists also warn that Federal Reserve Chairman Kevin Warsh's first policy meeting this month could jolt dollar-yen. The yen hit 160.09 against the dollar on Wednesday, its weakest level since April 30. Prime Minister Sanae Takaichi said that Japan's government would take appropriate action on foreign exchange at any time if needed, echoing comments from Finance Minister Satsuki Katayama.

"The Ministry of Finance could be concerned that the market's bias for yen weakness seems increasingly persistent and one-way and may act before the BOJ meeting," said Alex Loo, senior Asia economist at TD Securities in Singapore. "Some opportunities may be the US NFP this Friday or US CPI next week, as a downside miss may spur dollar weakness and the MOF may seize on this chance like they did in 2024."