Via Financial Times

The Japanese yen’s abrupt 3 per cent surge to three-year highs has prompted speculation among traders that the country’s giant state pension fund could be drafted into “stealth” intervention to restrain the currency, which analysts said has the potential to easily breach the critical level of ¥100 per dollar.

Speculation that the $1.6tn Government Pension Investment Fund — the world’s largest pension fund — could discreetly accelerate expected purchases of foreign bonds followed a flurry of Monday morning trading that in a matter of hours catapulted the yen to an intraday high of ¥101.7.

Currency dealers in Tokyo said the yen’s breach of ¥102 triggered a large number of stop-loss yen-buying trades by Japan’s army of leveraged retail investors trading foreign exchange.

The yen’s explosive rise against the dollar came as the Topix plummeted over 6 per cent in the morning session on fears that the double punch of an economic downturn and a strong currency would deflate the buoyancy that has characterised the “Abenomics” years since 2013.

Japanese authorities last intervened directly in currency markets after the 2011 Tohoku earthquake drove the yen to ¥75 per dollar. Traders currently assume that Japan does not want to repeat that at this stage, said Mansoor Mohi-uddin, NatWest Markets foreign exchange strategist, given the risk of infuriating Washington.

“Having the GPIF engage in stealth intervention is the most plausible way to stem the yen’s rise without incurring the wrath of Japan’s G7 partners,” said Mr Mohi-uddin.

The yen’s surge against the dollar involved a stampede from risk by Japanese investors and an unwinding of yen borrowing related to the carry trade — a flow of yen-buying often described as a “safe haven” trade. 

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According to traders, the currency’s rally raised the possibility the GPIF might discreetly step up planned purchases of overseas assets to offset the broad yen-buying.

The GPIF’s holdings of foreign bonds and foreign equities are already close to its respective targets of 15 per cent and 25 per cent, relative to its total assets, but Mr Mohi-uddin has noted that its guidelines allow significant fluctuation around those targets, giving it the scope to buy a further $140bn of overseas securities.

Adding to the vehemence of Monday’s rally were the weekend plunge in oil prices and mounting speculation that the Federal Reserve could end up having to cut US interest rates to zero by the end of March.

In an effort to calm the mood, Japan’s chief cabinet secretary, Yoshihide Suga, told a press conference on Monday the government would “take necessary measures for the economy without hesitation”. But he did not comment directly on the day’s market moves, leading forex analysts to conclude that it is unlikely the Ministry of Finance would formally intervene to weaken the yen.

Other speculation over the measures that Japan might take to restore market stability included the idea that the central bank could significantly increase its purchases of exchange traded funds. Since the start of March, the Bank of Japan has twice stepped in with record-smashing ¥100bn single-day purchases of ETFs.