The USD/JPY has surged to 159.45, the lowest level in 18 months. It’s just a hair away from the critical intervention line at 160, but it seems that warnings from Japanese authorities are not enough to stop the decline.

The most frantic reaction is in the options market—trading volume of call options is more than twice that of put options, and hedge funds are completely ignoring the Japanese Finance Minister’s "no measures are off the table" rhetoric. Some institutions are even betting that the yen will depreciate to 165 by directly betting on reverse knock-out options, betting on this wave of depreciation.

From a technical perspective, once the 162 level is broken, the concentration of options orders will amplify volatility, and in the worst case, the exchange rate could spike directly to 170. This is not just talk—once the stop-loss waterfall triggered by options is activated, the self-reinforcing wave of depreciation will start running on its own.

Why are Japanese authorities so powerless? There are three reasons behind this. First, the Bank of Japan has raised interest rates to a 30-year high, but the negative real interest rate environment persists, making holding yen unattractive. Second, the fiscal expansion worries caused by Prime Minister Sanae Tsunoda’s early election have kept the yen under heavy pressure. Third, even the U.S. Treasury Secretary has directly said that Japan’s verbal interventions are ineffective—and more realistically, out of Japan’s 1.3 trillion USD in foreign exchange reserves, only about 100 billion USD can be used for intervention, so their ammunition is limited.

The IMM net positions have also changed; the previous speculative positions have loosened, and the momentum for a rebound has disappeared. Even if Japanese authorities intervene forcefully now, it will be very difficult to replicate last year’s effect.

The key question in this currency storm is: can the yen hold at 160? Or will it continue to fall all the way to 170?