(Bloomberg) — The yen swung in holiday-thinned market conditions, punching through 160 per dollar to touch the weakest level in 34 years before erasing all its losses for the day and rebounding strongly.

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The Japanese currency dropped as much as 1.2% to 160.17 per dollar on Monday before heading into the other direction to rally over 1%. The moves, which took place amid thin liquidity due to a local public holiday, are a sign that investors are weighing prospects of official intervention and risks of hawkish comments by Federal Reserve later this week.

“The market is very jumpy and with not a lot of liquidity, the yen becomes a sharp toy to play with,” said Rodrigo Catril, a strategist at National Australia Bank. “The risk of intervention is an added factor.”

The US central bank is scheduled to hold a policy meeting during which it may signal the need to keep interest rates elevated amid sticky inflation — a move that would likely support the dollar and undermine the appeal of yen assets.

“Should there be no intervention, it would be dangerous to catch a falling knife, particularly with the Fed likely to signal a longer wait for cuts,” said Fiona Lim, senior strategist at Malayan Banking Bhd. “Momentum is definitely there for dollar-yen to move decisively above the 160 and markets are testing Japan’s tolerance for a sharp yen decline.”

The Bank of Japan last week indicated financial conditions will remain easy, though policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast. Earlier this month, the nation’s finance minister also flagged concerns over the yen’s decline to US Treasury Secretary Janet Yellen, which market participants saw as laying the groundwork for intervention.

Japan’s top currency official Masato Kanda has given an example of a 10-yen move over one month as a rapid one. Japan’s currency has weakened by about 8 yen per dollar over the last month, but it fell over 2% last week alone and is down more than 10% year-to-date.

One reason for Japan’s seeming reluctance to act may be that intervention alone cannot alter the wide gulf in interest rates that’s in part driving the yen’s decline. While the BOJ has brought local rates out of negative territory, they are still far from levels that would tempt investors from the higher yields on offer in the US and other countries.

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“The current pace of depreciation is less than in 2022 so the intervention response could be less intense,” wrote Vincent Chung, associate portfolio manager at T. Rowe Price. “Additionally, market participants have priced in the possibility of intervention by authorities following the BoJ meeting in May, as indicated by option pricing.”

Yen Watchers Ask When Japan Will Step In as Slide Accelerates

Bets in the options market helped to exacerbate the yen’s drop on Monday, with barriers against the dollar and euro being targeted on the view intervention risks were likely low during a Japan holiday, according to Asia-based traders. Against the euro, the yen has fallen beyond 170 to the weakest since the creation of the common currency.

“Pressures will remain on the currency until we get more downbeat growth and inflation data in the US and clearer hawkish shift at the BOJ,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore. “We still think we are quite close to the Finance Ministry’s intervention, in light of the recent rhetoric on excessive currency market moves.”

–With assistance from Michael G. Wilson and Matthew Burgess.

(Updates with comment.)

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