The Fear of Strong Jobs

Economic

Forex

Summary:

Even a hint of an improving U.S. jobs market sends shivers down investors' spines.

This is why the stronger than expected job openings data from the U.S. spurred panic across the global financial markets yesterday. Although hirings and firings remained stable, the financial world was unhappy to see so many job opportunities offered to Americans as the data hinted that the U.S. jobs market could be going back toward tightening, and not toward loosening. And that means that Americans will keep their jobs, find new ones, asked better pays, and keep spending. That spending will keep U.S. growth above average and continue pushing inflation higher, and the Federal Reserve (Fed) will not only keep interest rates higher for longer but eventually be obliged to hike them more. Alas, a catastrophic scenario for the global financial markets where the rising U.S. yields threaten to destroy value everywhere. PS. JOLTS data is volatile, and one data point is insufficient to point at changing trend. We still believe that the U.S. jobs market will continue to loosen.

But the market reaction to yesterday's JOLTS data was sharp and clear. The U.S. 2-year yield spiked above 5.15% after the stronger than expected JOLTS data, the 10-year yield went through the roof and hit the 4.85% mark. News that the U.S. House Speaker McCarthy lost his position after last week's deal to keep the U.S. government open certainly didn't help attract investors into the U.S. sovereign space. The U.S. blue-chip bond yields on the other hand have advanced to the highest levels since 2009, and the spike in real yields hardly justify buying stocks if earnings expectations remain weak. The S&P500 is now headed towards its 200-DMA, which stands near the 4200 level. The more rate sensitive Nasdaq still has ways to go before reaching its own 200-DMA and critical Fibonacci levels, but the selloff could become harder in technology stocks if things got uglier.

In the FX, the U.S. dollar extended gains across the board. The Reserve Bank of New Zealand (RBNZ) kept the interest rate steady at 5.5% as expected. Due today, the ADP report is expected to show a significant slowdown in U.S. private job additions last month; the expectation is a meagre 153'000 new private job additions in September. Any weakness would be extremely welcome for the rest of the world, while a strong looking data, an – God forbid – a figure above 200K could boost the Federal Reserve (Fed) hawks and bring the discussion of a potential rate hike in November seriously on the table.

The EUR/USD consolidates below the 1.05 level, the USD/JPY spiked shortly above the 150 mark, and suddenly fell 2% in a matter of minutes, in a move that was thought to be an unconfirmed FX intervention. Gold extended losses to $1815 per ounce as the rising U.S. yields increase the opportunity cost of holding the non-interest-bearing gold.

The barrel of American crude remains under pressure below the $90pb level. U.S. shale producers say that they will keep drilling under wraps even if oil prices surge to $100pb, pointing at Joe Biden's war against fossil fuel. A tighter oil supply is the main market driver for now, but recession fears will likely keep the upside limited, and September high could be a peak.

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Damon

Economic

Too far, too fast?

It's messy out there. It's not often you get a 10bp uplift in the 10-year yield in one day. We had one yesterday. And we've had over a 50bp upmove in the past three weeks. It's now at 4.8%, and looking like it's gone too far too fast. But if we don't look down, that 5% level could be with us quite quickly. It's clear also that Treasuries are a dominant driver out there. It's pulling other yields higher, is hurting equities, and is pretty immune to influence from risk off.

Typically, a severe enough risk-off event would put some counterflows back into Treasuries. And there have been some. Right through the rise in yields in the past couple of months there have, in fact, been net inflows into Treasuries. But this has not been enough to dominate price action. In fact, prices have moved first, not so much in reaction to flows, but in anticipation of them. And of course, in reaction to data that continues to show the U.S. economy continuing to defy recession worries.

The JOLTS data are a case in point. This measure of "job openings" had been coming off the pandemic sugar high which saw them peak out in the 12 million area. A huge level. It compares with a long-run average in the 2.5 million area. It had been falling since mid-2022, and got to below nine million last month. But the latest month shows a pop back up towards 10 million (9.6m). That's a remarkable move in light of the inflation/rates/sentiment headwinds that arguably should be impacting the economy more.

And the curve continues to pull steeper (dis-inversion). As we ended the summer, the 2/10yr was in the -75bp area. It's now half that, and just 35bp away from breaking back above zero into positive territory. It's been pulled there by higher longer tenor real rates. The 10-year real yield is now knocking on the door of 2.5%, having been below 2% only a few weeks back. And importantly, inflation expectations are broadly steady. This angst mode has been driven entirely by higher real rates, and signs of underlying macro strength.

Note, however, that higher real yields are also more painful than ones driven by higher inflation. The latter can be passed on through higher prices at the corporate level. But higher real rates are more difficult to "pass on". They are essentially a tax on the borrower that must be paid to get any type of re-funding done. That is arguably where the next vulnerability lies. Risk assets are reacting to this, but there is the potential for more pain here ahead, especially in the guise of wider credit spreads.

Longer EUR real yields also at highs, Italian spreads resume widening

As U.S. Treasury yields surged for another day Bund yields got pulled higher, ending just below 2.97% and thus still a sliver below last week's high. What we noted at the start of the week still held yesterday – inflation swaps are edging lower. This means that the rise in real yields is more severe.

2-year real ESTR OIS rates are above 1% but have not quite taken out the July peak yet. 5-year real rates have passed the peak with the start of this week surging to 0.8%, while the 10-year at 0.83% already broke above previous highs last week. The European Central Bank hawks, such as Isabel Schnabel who typically has an eye on this indicator as a measure of effective financing conditions, may see this as necessary tightening to counter inflationary pressure.

In Italy, the sale of the BTP Valore bonds extends into its third day. Days one and two saw strong demand with orders accumulating to €9.3bn, and this is on track for a final volume in the ballpark of €15bn by the end of the week. Nonetheless, the widening of Italian government bond spreads resumed. The key 10-year spread versus Bunds topped 190bp again and thus more than offset Monday's recovery.

The directional nature of the spread certainly made it tough to withstand the rise in outright rates, but we also got more hawkish ECB talk on potentially ending the reinvestment of the Pandemic Emergency Purchase Programme portfolio sooner. We would note that even the likes of Austria's Robert Holzmann acknowledge that the flexibility of reinvestments is an important backstop to spreads. He suggested that the staff would look into how to maintain that flexibility even when reinvestments are slowed.

Today's events and market view

There seems little in the way to stop yields from rising further. Data only accelerated the sell-off over the past few sessions but could turn out to be a bit more of a headwind today, that is, if expectations about the ISM services are right. That index is seen easing back somewhat, although still staying in expansionary territory. The other data point to watch is the ADP payrolls estimate, though it has a patchy track record of predicting the official numbers two days later.

Over in Europe, the main releases are the producer prices, retail sales and final services PMIs, including some first readings for individual countries such as Spain and Italy. Attention will also fall again on ECB speakers, this time including President Christine Lagarde, Vice President Luis de Guindos and from the very dovish end Fabio Panetta.

In sovereign supply, we will see the continuation of Italy's BTP Valore sale. Germany will tap 7-year Bunds for €3bn while the UK sells 2-year gilts for £4.25bn. In SSAs, the EFSF mandated banks for a new 5-year bond and a 10-year tap, which should be today's business - and the EFSF's final issuance for the year.

Source: ING

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Samantha Luan

Forex

Economic

Dollar is finding strength amidst an atmosphere of palpable anxiety in the financial markets, stemming from a continuation of the risk-off mood from U.S. into Asian session. This prevailing anxiety in the markets has been heightened by the pronounced drop in U.S. stocks overnight, coupled with a surge in long-end treasury yields. Adding to the complexity, there's been a quick normalization in the yield curve accompanied by a notable spike in the VIX fear index. As investors brace themselves, the focus now pivots towards the forthcoming U.S. ADP employment and ISM Services data. However, the market is caught in a conundrum, trying to decipher if positive data will quell or exacerbate the prevailing anxiety.

At the same time, Yen has made significant strides, an strong bounce that could be attributed to Japan's unconfirmed intervention in the currency markets. However, this edge was short-lived, with USD/JPY experiencing a swift rebound. Current behavior suggests that speculators might have been gearing up to capitalize on Yen sales, rather than aligning with Japan's presumed objective of buying the currency. With the financial climate teetering on unease and impending significant data releases like Friday's U.S. NFP, we can expect substantial fluctuations in USD/JPY in the immediate future.

Following RBNZ's decision to keep interest rates steady, New Zealand Dollar is currently languishing near the bottom of the currency chart. Aussie, too, is underperforming, particularly after RBA's parallel decision yesterday. For the time being, European majors display a mixed performance, though the Swiss Franc is exhibiting a slight advantage. Yet, when considering their performances against each other, Euro, Sterling, and Swiss Franc are trading within their usual bounds.

Technically, EUR/AUD is now pressing 1.6650 resistance after this week's bounce. Firm break there will argue that correction from 1.7062 has completed after drawing support from medium term rising trend line. Stronger rally would be seen back to retest 1.7062 high next. If realized, that would be a signal of more broad based selloff in Aussie, as probably intensification of risk aversion too. Escalating Risk Aversion Meets Yen Intervention_1

Escalating Risk Aversion Meets Yen Intervention_1

In Asia, at the time of writing, Nikkei is down -1.87%. Hong Kong HSI is down -0.99%. Singapore Strait Times is down -1.50%. Japan 10-year JGB yield is up 0.033 at 0.797, just shy of 0.8 handle. Overnight, DOW dropped -1.29%. S&P 500 dropped -1.37%. NASDAQ dropped -1.87%. 10-year yield rose 0.119 to 4.802.

Japan's top brass remains mum on intervention claims

Market watchers were in a frenzy after Japanese Yen surged from 150 to the 147 zone against Dollar overnight , fuelling speculation that Japan's government may have stealthily intervened to push up the struggling currency. While evidence of a Yen-buying, Dollar-selling maneuver abounds, top officials in Japan remained tight-lipped today.

Finance Minister Shunichi Suzuki, when confronted by reporters, chose the path of silence over confirmation. He held back from validating the swirl of speculations about intervention. Suzuki reiterated a standard narrative, emphasizing the desirability of market-driven, stable currency movements that mirror economic fundamentals.

"Currency rates ought to move stably driven by markets, reflecting fundamentals. Sharp moves are undesirable," Suzuki noted. "The government is monitoring market developments very carefully with a sense of urgency. We will take appropriate steps against excessive volatility without excluding any options."

Masato Kanda, the top currency diplomat, provided insights into the government's assessment mechanism for currency movements. "If currencies move too much on a single day or, say, a week, that's judged as excess volatility," Kanda explained.

The implied volatility stands as a critical metric, among others, shaping the official perspective on whether Yen's moves are reaching alarming amplitudes.

Kanda further outlined that even in the absence of abrupt shifts, a gradual yet one-sided build-up of significant currency movements over time is also classified as excessive volatility. However, he too refrained from offering a direct commentary on the overnight upswing of Yen.

RBNZ holds rates, hints at longer duration of restrictive policy

RBNZ has opted to keep the Official Cash Rate stable at 5.50%, aligning with broad market anticipations. The minutes of the meeting revealed a consensus among committee members that restrictive interest rate environment might be needed "for a more sustained period of time".

In the short term, RBNZ is looking at a scenario where domestic demand could exhibit "greater resilience", spurred by migration. This situation could "slow the pace of expected disinflation". A related concern is wage inflation, which could take a longer time to ease than initially expected. Recent rise in oil prices could also risk "headline inflation being higher than expected".

Looking at the medium term, the minuted noted concerns about greater slowdown in global growth. Such a downturn could lead to further reductions in non-oil import prices. Moreover, weakened global demand, with a particular emphasis on China, could exert additional pressure on commodity prices, subsequently affecting New Zealand's export revenues.

Anxiety grips Wall Street: DOW plummets, VIX jumps, Yields soar

Economic storm clouds appear to be gathering on the horizon. With DOW experiencing its most significant drop since March and key Treasury yields touching multi-year highs, whispers of a potential recession are becoming more audible. This is further exacerbated by the behavior of VIX, often dubbed the "fear index", which indicates heightened market apprehensions.

DOW plummeted by -430.97 points, or -1.29%, nudging it into negative territory for the year, now lagging by -0.4%. This downturn wasn't isolated to stocks. The 10-year yield reached a staggering 4.8%, a pinnacle not seen in 16 years. Similarly, 30-year yield hit a peak of 4.925%, levels of which we haven't seen since 2007.

Escalating Risk Aversion Meets Yen Intervention_2

The narrowing gap between the 2-year and 10-year Treasury yields, contracting to a mere 35 basis points from over 100 basis points a few months earlier, is especially concerning. This normalization, or "de-inverting", of a vital part of the yield curve is often viewed as a precursor to economic downturns, igniting debates on the imminence of a recession.

Adding to the market's jitters, VIX has climbed for three consecutive sessions, momentarily crossing the critical 20 level and finishing at a six-month high. Values below 20 on the VIX generally signify market stability, but as it surpasses this threshold, it denotes an environment fraught with investor unease and skittishness.

Escalating Risk Aversion Meets Yen Intervention_3

Back to DOW, it's now pressing and important near fibonacci support at 38.2% retracement of 28660.94 to 35679.13 at 32998.17. Sustained break of this level will strengthen the case that fall from 35679.13 is reversing whole rise from 28660.94. This decline could be viewed as the third leg of the long term pattern from 36952.65 high. Deeper fall would be seen to 31.429.82 support, which is close to 61.8% retracement at 31341.88.

In any case, near term outlook will stay bearish as long as 34029.22 support turned resistance holds. The rest of the week, with ISM services today and non-farm payrolls release on Friday, will be crucial.

Looking ahead

Eurozone PMI services final, PPI and retail sales will be released in European session. UK will also release PMI services final. Later in the day, U.S. ADP employment ISM services and factory orderes will take center stage.

USD/JPY Daily Outlook

USD/JPY spiked lower to 147.28 overnight, on alleged intervention by Japan, but recovered quickly since then. As short term top should be in place at 150.15, on bearish divergence condition in 4H MACD. Intraday bias is turned neutral first and more corrective could be seen. But there is no confirmation of bearish trend reversal before firm break of 144.43 support. Another rally remains mildly in favor through 150.15 to retest 151.93 high. Escalating Risk Aversion Meets Yen Intervention_5

Escalating Risk Aversion Meets Yen Intervention_5

In the bigger picture, while rise from 127.20 is strong, it could still be seen as the second leg of the corrective pattern from 151.93 (2022 high). Rejection by 151.93, followed by sustained break of 145.06 resistance turned support will be the first sign that the third leg of the pattern has started. However, sustained break of 151.93 will confirm resumption of long term up trend. Escalating Risk Aversion Meets Yen Intervention_6

Escalating Risk Aversion Meets Yen Intervention_6

Source: ActionForex

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Alex

Central Bank

Economic

Forex

The RBNZ left the OCR unchanged at 5.5% as expected. The tone of the accompanying statement is somewhat more dovish than expected.

The RBNZ left the OCR unchanged at 5.5% as expected.
The tone of the accompanying statement is somewhat more dovish than expected.
The RBNZ assessment of the balance of risks looks unchanged from the August Statement
We think this means that the RBNZ is less likely to raise the OCR by 25 basis points at the November Monetary Policy Statement than we forecast.
Key factors that will determine the probability and size of a November tightening will be the outcome of the Q3 CPI due 17 October and the Q3 Labour market reports due 1 November.

The RBNZ left the OCR unchanged at 5.5% and communicated a relatively dovish statement on the future OCR in the accompanying statement.

The overall tone of the statement and record of meeting displayed a similar degree of concern regarding the persistence of inflation pressures than previously communicated. Market pricing for around a 60% chance of a 25-bps tightening at the November Monetary Policy Statement looks too hawkish and is now adjusting.

The MPC’s seems to still be concerned about the possibility of persistent inflation pressures and that the economy might not weaken as fast as required in the short term. The MPC noted that GDP was stronger than they expected in the first half of 2023. However, the RBNZ retains confidence that the required amount of slowdown will ultimately occur in light of recent indicators such as the QSBO and PMI indicators. Notably, concerns around increased house prices are not as prominent as in our own assessment with the MPC wanting to see how house prices evolve in the summer period when more activity usually occurs. The MPC seems to also take comfort from the increase in mortgage rates that has occurred since August as global long-term rates have increased, helping add disinflationary pressure.

Medium term growth and inflation pressures are seen as being held in check by the continued slowing of the global economy and China in particular given that commodity prices continue to be lower than last year.

We see this statement as more dovish than our expectations. We anticipated the RBNZ would craft a statement that broadly endorsed current market pricing for around a 50/50 chance of a 25 bp rate rise in November. This statement suggests that view was too hawkish. By not communicating any further concern on the inflation outlook means the hurdle for a November tightening remains high.

While we continue to see a 25 bp rate hike in November at this stage, but this must be a lower probability than previously thought. The Q3 CPI and Labour market data will be key to the probability/size of that rate increase as also will global economic and financial markets developments.

Source: Westpac Banking Corporation

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CMC

Economic

Forex

Yesterday saw another day where rising U.S. yields and a strong U.S. dollar continued to exert downward pressure on stock markets with the DAX sinking to a fresh 6-month low, while the FTSE250 fell below its July lows to its lowest levels this year.

U.S. markets also fell back with the S&P500 closing just above its 200-day SMA, as well as at a 4-month low. The Nasdaq 100 also had a poor day after the latest numbers for job openings jumped sharply in August by 600k, while the Dow slipped into negative territory for the year.

The sharp rise in long term rates relative to short term rates suggests investors think that U.S. interest rates are likely to remain higher for longer due to the continued resilience of the U.S. economy. Consequently, this bear steepening is slowly unwinding the inversion of the 2/10s from the -105bps we saw at the end of June and where we are now at -35bps.

If this trend of rising long-term rates continues, then stock markets could well be in for even more volatility in the days and weeks ahead.

Let's not forget 2-year yields are still above 10-year yields, a situation which is far from normal. Under normal circumstances long term rates would be above short-term rates, which means this yield adjustment still has some way to go. How it plays out will be key to how stock markets perform over the next few weeks.

Also weighing on U.S. markets was the voting out of U.S. House speaker Kevin McCarthy, by fellow dissident Republicans on disappointment over the weekend agreement of a deal to avert a U.S. government shutdown until November 17th.

With the House now without a majority leader, a new leader will need to be appointed, a time-consuming process if the McCarthy experience is any guide, which could complicate the prospect that we might get a new deal when the current deal expires next month.

If you thought UK politics was dysfunctional, then the U.S. runs it a close second.

The weak finish in the U.S. looks set to translate into a weak European open, with Asia markets falling sharply this morning with the focus today on the services sector and the latest U.S. ADP jobs report.

The recent flash PMIs for France, Germany and the UK suggest further economic weakness in the services sector in September.

France especially has seen a sharp slowdown despite hosting the Rugby World Cup with the flash services number falling to 43.9 from 46. Germany, on the other hand, saw a modest pickup from 47.3 to 49.8.

In the UK we also saw a modest slowdown from 49.5 to 47.2, as concerns about a Q3 contraction across Europe continued to gain strength.

The weak flash readings from France and Germany make it even more puzzling as to why the ECB felt it necessary to raise rates at its last meeting, although one suspects it may well have been its last. In the U.S. the services sector is proving to be more resilient at 50.2, while the ISM services survey has tended to be more resilient and is expected to come in at a fairly solid 53.5.

Yesterday the latest JOLTS numbers for August showed a big jump in vacancies to 9.6m in a sign that the U.S. labour market remains surprisingly resilient driving long term U.S. yields to new multiyear highs. Today's ISM as well as ADP payrolls report could add further fuel to that yield fire with another set of strong numbers, ahead of Friday's September payrolls report.

ADP payrolls saw 177k jobs added in August, falling slightly short of forecasts of 195k. Slightly offsetting that was sizeable upward revision to July from 324k to 371k, but overall, the main gains have been in services. Expectations are for 150k jobs to be added.

EUR/USD – has slipped below the 1.0480 lows of last week, opening up the potential for a return towards parity, with the next support at 1.0400 which is 50% pullback of the 0.9535/1.1275 up move, followed by 1.0200. The main resistance remains back at the 1.0740 area, which we need to get above to stabilise and minimise the risk of further weakness.

GBP/USD – looks set for a test of the 1.2050 area with a break targeting the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.

EUR/GBP – appears range bound with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.

USD/JPY – made a 12-month high of 150.16 yesterday before plunging to 147.35 on the back of possible intervention from the Bank of Japan. With no confirmation at the time of writing that intervention took place, any further moves higher could be choppy. Below 147.30 signals the top is in.

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Titan FX

Commodity

Gold Price Technical Analysis

Gold price started a major decline from well above $1,920 against the U.S. Dollar. The price declined heavily below the $1,900 support zone.

Gold Price Nosedives, Recovery Could Be Limited_1

The 4-hour chart of XAU/USD indicates that the price settled above the $1,865 level, the 200 Simple Moving Average (green, 4 hours), and the 100 Simple Moving Average (red, 4 hours).

The decline was even extended below the $1,840 level. A low was formed near $1,815 and the price is now consolidating losses. On the upside, the price is facing resistance near the $1,832 and $1,835 levels.

The next major resistance is near the $1,840 level, above which Gold could revisit the key $1,850 resistance zone. Any more gains might call for a move toward $1,880.

On the downside, the price might find support near the $1,815 level. The next key support is near $1,800. If the bulls fail to protect the $1,800 support, there is a risk of a major decline. In the stated case, the price could decline toward the $1,750 level.

Looking at crude oil prices, there was a sustained upward move toward the $95.00 level before the bears appeared and initiated a downside correction.

Economic Releases to Watch Today

Germany's Services PMI for Sep 2023 – Forecast 49.8, versus 49.8 previous.

Euro Zone Services PMI for Sep 2023 – Forecast 48.4, versus 48.4 previous.

UK Services PMI for Sep 2023 – Forecast 47.2, versus 47.2 previous.

U.S. Services PMI for Sep 2023 – Forecast 50.2, versus 50.2 previous.

U.S. ISM Services PMI for Sep 2023 – Forecast 53.6, versus 54.5 previous.

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Thomas

Forex

Japanese authorities are facing renewed pressure to combat a sustained depreciation in the yen, as investors eye prospects of higher-for-longer U.S. interest rates while the Bank of Japan remains wedded to its super low interest rate policy.

The yen strengthened sharply against the dollar on Tuesday, leading some market participants to believe Japanese policymakers had intervened to support the currency, although others said the size of the move was not convincing enough.

Below are details on how yen-buying intervention works:

Last confirmed yen-buying intervention?

Japan bought yen in September of last year, its first foray in the market to boost its currency since 1998, after a Bank of Japan (BOJ) decision to maintain its ultra-loose monetary policy drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94.

Why step in?

Yen-buying intervention is rare. Far more often the Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas.

But yen weakness is now seen as problematic, with Japanese firms having shifted production overseas and the economy heavily reliant on imports for goods ranging from fuel and raw materials to machinery parts.

What happens first?

When Japanese authorities escalate their verbal warnings to say they "stand ready to act decisively" against speculative moves, that is a sign intervention may be imminent.

Rate checking by the BOJ - when central bank officials call dealers and ask for buying or selling rates for the yen - is seen by traders as a possible precursor to intervention.

Did Tokyo intervene again?

Japan's top currency diplomat Masato Kanda told reporters on Wednesday authorities will take "appropriate steps against excessive moves, without ruling out any options." Kanda, who has made similar comments in recent weeks, declined to say whether Tokyo intervened overnight on Tuesday.

Kanda may be relying on psychological tactics to fight yen bears, as Tokyo did last October by holding off on immediately confirming whether intervention took place.

By staying mum, authorities can keep investors guessing and discourage speculators from testing the yen's new lows - a tactic known as "stealth intervention."

Investors will know whether Tokyo intervened, and if so how much it spent, when the Ministy of Finance releases monthly intervention data, usually at the end of each month.

Line in the sand?

Authorities say they look at the speed of yen falls, rather than levels, and whether the moves are driven by speculators, to determine whether to step into the currency market.

With the dollar having breached the psychologically important 150-yen level, many market players see 151.94 yen, where Japan last intervened, as the next threshold, then 155.

What's the trigger?

The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, that puts pressure on the administration to respond. This was the case when Tokyo intervened last year.

While inflation remains above the BOJ's 2 per cent target, public pressure has declined as fuel and global commodity prices have fallen from last year's peaks.

If the yen's slide accelerates and draws the ire of media and public, the chance of intervention would rise again.

The decision would not be easy. Intervention is costly and could easily fail, given that even a large burst of yen buying would pale next to the $7.5 trillion that change hands daily in the foreign exchange market.

How would it work?

When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills, raising yen it then sells to weaken the Japanese currency.

To support the yen, however, the authorities must tap Japan's foreign reserves for dollars to sell for yen.

In either case, the finance minister issues the order to intervene, and the BOJ executes the order as the ministry's agent.

Challenges?

Yen-buying intervention is more difficult than yen-selling.

While Japan holds nearly $1.3 trillion in foreign reserves, these could be substantially eroded if Tokyo intervened heavily repeatedly, leaving authorities constrained over how long they can defend the yen.

Japanese authorities also consider it important to seek the support of Group of Seven partners, notably the United States if the intervention involves the dollar.

Washington gave tacit approval when Japan intervened last year, reflecting recent close bilateral relations. U.S. Treasury Secretary Janet Yellen said last month the question of Washington giving the greenlight over another yen-buying intervention by Japan "depends on the details" of the situation.