The dollar is sliding against the yen after Japan's market intervention, but the yen's advance won't last long, analysts say

• The US dollar dropped against the Japanese yen on Thursday after Japan intervened in the currency market for the first time since 1998.
• Japan is trying to defend the yen's value which has dropped 25% against the greenback this year.

The US dollar sank to a two-week low against the Japanese yen Thursday after Japan dumped dollars to defend its battered currency, but the yen's gain is unlikely to last long with the Federal Reserve committed to aggressive interest rate increases, analysts said.

The dollar lost as much as 2.6% when it hit 140.33 against the Japanese yen, the lowest level since September 6. But the dollar narrowed the loss to 1.2% to buy 142.23 yen.

Japan's first intervention in the currency markets since 1998 was acknowledged by the US Treasury Department.

"The Bank of Japan today intervened in the foreign exchange market. We understand Japan's action, which it states aims to reduce recent heightened volatility of the yen," the Treasury said in a statement. It was Japan's first currency market intervention since 1998.

The dollar this year has climbed 25% against Japan's currency, underscoring the greenback's broad strength against major currencies as the Federal Reserve aggressively raises rates to combat inflation. The US Dollar Index has gained about 16% during 2022.

The Fed on Wednesday issued its third straight increase of 75 basis points. The Bank of Japan at its meeting Thursday kept rates at minus 0.1% and reiterated its long-standing policy of buying 10-year bonds daily, moves aimed at holding the 10-year yield at 0.25%. The BOJ has been controlling its yield curve since 2016 in an effort to increase inflation.

The "timing of this was very poor, wasn't it? Just hours after the BOJ's inaction, you decide to buy huge amounts of yen with your dollar reserves. The government has so much [in] foreign reserves and it will need to repeatedly buy more and more yen in order to defend its value," Fawad Razaqzada, market analyst at Forex.com, wrote in a note. The yen this year hit a 24-year low against the dollar.

"For the government's intervention to be more effective, the BOJ will need to close its diverging monetary policy stance with the US Federal Reserve (and other major central banks around the world," he wrote.

While Japan's 10-year bond yield hovers around 0.25%, the US 10-year Treasury yield soared past 3.6% on Thursday, the highest since 2011. The higher yield makes owning US debt more attractive to holders of foreign currencies and weighs on the yen's value.

The BOJ "has again extended its increasingly lonely run of dovish policy," Mark Haefele, UBS Global Wealth Management's chief investment officer, said in a note. "Alongside growing rate differentials, Japan's weak trade balance (in part due to elevated energy prices) has also contributed to the yen's weakening. We see upside risk to USDJPY in the near term."

The yen's jump on the back of the Japanese Finance Ministry's intervention "may not be the last," Craig Erlam, senior market analyst at Oanda, said in a note. "Interestingly, the level the pair reached was only a little shy of that in 1998 when it last intervened, prompting further speculation about whether this is the unofficial line in the sand," he said.

"That has been denied but the rate check also occurred around 145 so perhaps there is more to it than just volatility. It will be interesting to see how keen traders are to put that to the test in the future," he wrote.