The world likely witnessed a “speculative attack” against the Japanese yen late Wednesday.

“Speculative attack” is a phrase frequently uttered by policy makers and analysts alike. 

In the midst of fear and uncertainty, speculators sometimes attack the market and push it over the edge. 

For example, if there are rumors that a company is on the verge of failing, speculators may aggressively short the stock, thereby pushing down its price. When this happens, other investors may assume the worst case scenario, capitulate, and sell the stock.

“Speculative attack” may also refer to traders challenging the credibility of misguided government policy. For example, in 1992, UK authorities insisted they would stay in the European Exchange Rate Mechanism in defiance of economic realities; traders then sold the pound sterling to the Bank of England until the latter couldn’t afford to defend the pound anymore.

In Wednesday’s case, it was speculators taking advantage of uncertainty and the dearth of information regarding Japan’s nuclear meltdown. Around 5 p.m. Eastern time, the yen surged almost 340 pips against the dollar, or about 4 percent, in a span of only 30 minutes. At the trough, USD/JPY made the all-time low (or all-time high, from the yen’s perspective) of 76.39.

If a trader were long the yen versus the dollar at 100 times the leverage (which is typical in the retail forex industry), he would have returned 400 percent in about 30 minutes.

There was no real news or development that triggered the sudden move in the thin market, nor was it done by corporate participations. The most likely culprits, therefore, were speculators.

Japanese authorities have already concluded that speculators were responsible for the huge move. 

Michael Woolfolk of BNY Mellon said: “A successful test of the 80.00 prompted speculators to attack the JPY once it was determined the the BOJ would not put up any significant resistance.”

Lee Hardman of Bank of Tokyo-Mitsubishi said: “This entire move can be pinned down to speculative positioning rather than any repatriation flows.”

The attack in this case is interesting in that speculators were buying instead of selling because the yen rallies on fears and expectations of repatriation. Moreover, Japanese authorities prefer the yen to be lower than current levels, so speculators were pushing against the wishes of policymakers.

What’s the impact of “speculative attacks” in the markets, generally speaking?

Many would argue that they don’t matter.  In unsustainable situations, like the 1997 East Asian financial crisis and the 1992 pound sterling crisis (Black Wednesday), speculators fast-tracked the inevitable outcomes.

However, when fundamentals don’t support speculators, natural buyers/sellers step in and take care of the problem.  When the attack on the yen occurred, sellers quickly stepped in and pushed the yen down near the pre-attack levels in about 4 hours. 

According to Brad Bechtel of Connecticut-based Faros Trading, Japanese corporations were leading sellers of the yen during that corrective move. 

However, others would argue that even if speculative attacks produce only temporary effects on the market when fundamentals don’t support them, the volatility that speculators cause are still damaging.

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