….and breathe.

The yen‘s blistering rally seems to have run out of energy, writes Katie Martin. Having dropped to just under Y108 against the yen yesterday, the dollar is now hovering around Y108.63. Market participants are a tad nervous about pushing the yen much higher from here, for fear that the Bank of Japan could step in to stop the climb. (Officials have been expressing concern, unsurprisingly, given the blow that yen strength inflicts on companies.)

Commerzbank compares the stand-off to childish bullying.

That was the fault of the Japanese central bankers. One of the reasons behind the rate cut of 29th January was to send the signal that the BoJ wants a weaker yen. The market rudely rejected this approach and caused the yen to appreciate again following a very brief correction. The BoJ accepted this provocation and did not add further measures. By doing so it drove speculative market participants into long-yen bets. It suddenly became clear: the BoJ will put up with a stronger yen – at least for the time being. The fact that the Japanese government and central bank reacted very meekly to the accelerating yen appreciation led to a further acceleration. Sometimes the FX market is like the school yard. Anyone who fails to defend themselves simply attracts even more attention from the bullies.

The result was plain to see yesterday: the dollar traded below the Y108-mark. Even if we have since seen a correction – which was weak in comparison to the original move – the underlying problem of a weak BoJ remains in place.

I am of the view though that the momentum of the JPY appreciation might ease from here. This morning’s correction could be a first indication. In the meantime the yen move has reached sufficient momentum for the Japanese government to possibly justify interventions.

Hans Redeker at Morgan Stanley says the yen is in danger of breaking higher unless it gets some help from a more hawkish Fed, but he is doubtful that the BoJ would take action.

Talk of intervention has picked up. However, we are skeptical of large-scale FX intervention at the current juncture, given that PM Abe pushed against such options in a recent interview, and given that the next G7 summit will be held in Japan next month. From the BoJ’s side, we are skeptical as well that further interest rate cuts or expansion of QQE will reverse yen strength – both tools are hitting their limits. If the BoJ wants to counter the trend in the yen, it will need to buy private sector assets in large size, in our view.

Read more: What to expect when you’re expecting the BoJ to stop a yen rally

Listen: Podcast on the yen with BNY Mellon’s Simon Derrick

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