Key takeaways include that despite a coordinated intervention by the US last week, analysts broadly believe the yen's rebound will be unsustainable. The yen's fundamentals remain in a "weak position." HSBC points out that a structural shift in the Bank of Japan's policy is the key to a sustained yen appreciation.
On Thursday, the yen hovered near 38-year lows, with the dollar-yen pair under sustained pressure above the 160 level, keeping markets highly alert for potential yen-buying intervention by Japanese authorities. The US action to assist Japan in propping up the weak yen triggered a sharp short-term rally for the currency, accumulating a gain of about 5%, though gains narrowed on Monday.
This joint intervention pushed the dollar-yen pair back from a 40-year low above 163 to around 157. However, analysts believe it is difficult for the yen to sustain a bullish trend under the pressure of weak fundamentals. In a note on Monday, UBS strategists Teck Leng Tan and Dominic Schnider wrote: "Japan's current policy mix is not conducive to a sustained yen appreciation. The market expects the Bank of Japan to proceed with a slow policy normalization, while real interest rates remain negative. The sources of support for the yen come more from intervention expectations than from domestic monetary fundamentals."
Was it a sell-off of the dollar or the euro?
During Japan's two separate interventions in 2022 and 2024, it consistently sold dollars and bought yen. It is understood that Japan followed the same approach this time, but there are reports that the US Treasury may have chosen to sell euros to buy yen this time around. Regardless of the method, the dollar's overall reaction on Monday was muted. Chris Turner, head of markets at ING, analyzed that the dollar remains resilient, "mainly because the market is still uncertain whether the Fed will cut rates in September." Rate hike expectations imply upside potential for US Treasury yields, thereby attracting global funds to increase holdings of US bonds.
HSBC adds that a structural adjustment in the Bank of Japan's underlying policy is the core condition for sustained yen strength. In a Monday research note, analysts wrote: "Unless the Bank of Japan accelerates rate hikes, the government's stance on the yen exchange rate becomes clearer (rather than the general statement that yen depreciation has both pros and cons), and fiscal expansion plans are scaled back, we find it difficult to judge that the dollar-yen pair will enter a downtrend."
Could the intervention backfire?
Robin Brooks, a senior fellow at the Peterson Institute for International Economics, argued in a Substack column that this joint intervention could ultimately weaken market confidence in the yen. He noted that if the US chose to sell euros rather than dollars to buy yen, investors would interpret this as the US aiming to prevent Japan from selling US Treasuries to raise funds for intervention. Traditional joint interventions use dollar-denominated assets as operational funds, so the news of "selling euros to buy yen" surprised the market. Brooks stated: "In my view, this method of operation weakens the effectiveness of US participation in the intervention. The market will inevitably question: why doesn't the US directly use dollar funds to buy yen?"
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