Nearly half of the yen's gains from the historic joint U.S.-Japan currency intervention have been erased, as investors point to a lack of unified messaging from central banks that undermined the market-supporting effect of the operation. After hitting a 40-year low near 164 against the dollar in late July, the yen rebounded to around 155 following intervention by both countries but has since fallen back.
The dollar weakened 1% on Monday, pushing the yen to 159.36, before a slight dollar recovery on Tuesday brought it back to 159.08. Latest data from the Commodity Futures Trading Commission shows that traders in the futures and options markets still hold short positions on the yen, though they have reduced their positions since the intervention.
Andrew Van, Head of Global Solutions Strategy at Russell Investments, noted that "the effect of the intervention is fading, and more supporting measures are needed to drive sustained yen strength." Investors believe that without a rate hike from the Bank of Japan, the intervention is unlikely to provide lasting support. Additionally, the lack of international coordination has significantly weakened its impact.
Media reports last week revealed that the U.S. sold euros to support the yen, an unusual move, without prior coordination with the European Central Bank. Guy Miller, Chief Market Strategist at Zurich Insurance, commented that "the ECB not participating in the coordinated intervention does more harm than good. A synchronized effort by multiple central banks would send a unified message to the market." This operation contrasts sharply with the 2011 G7 coordinated intervention to weaken the yen after Japan's earthquake.
Attention now focuses on whether the Bank of Japan will be forced to raise rates to support the yen. The currency remains under pressure from multiple inflation concerns, including government spending and rising oil prices. Japan's Ministry of Finance conducted two separate interventions in April and May, which only temporarily stabilized the exchange rate.
Analysts at Goldman Sachs in Tokyo noted that the Bank of Japan kept its key rate at 1% during its July meeting, but a summary of opinions showed that "the overall risk balance clearly leans toward an earlier rate hike." Minutes from the meeting, released on Monday, quoted one member as saying that "core CPI inflation is approaching 2%, and compared to the past, more attention should be paid to upside risks to prices; the pace of rate hikes could be faster than market expectations."
Traders are pricing in roughly a 50% probability of a 25-basis-point rate hike at the Bank of Japan's next meeting in September. Analysts at Citigroup predict a policy shift, with rate hikes accelerating from September, pushing the benchmark rate to 2% by the end of next year.
If the yen breaks below the 160 level again—a threshold that has previously triggered Japanese intervention—it could fuel imported inflation and heighten concerns among U.S. policymakers about excessive dollar strength and whether Japan might use its massive U.S. Treasury holdings for larger-scale currency intervention.
Some investors see parallels with the environment in August 2024, when heavy short positions on the yen and undervaluation by traditional metrics like purchasing power parity preceded a sudden yen surge that triggered global market turmoil. The market is rife with carry trades, where investors borrow yen at extremely low rates to invest in other assets, and a concentrated unwinding of these positions could impact overseas markets.
Van noted that current short yen positions are massive, creating a situation somewhat similar to 2024. If economic data or policy shifts force rapid pricing of a "dovish Fed, hawkish BOJ" scenario, the yen could see a sharp rally similar to that period. However, other analysts argue that even with faster Bank of Japan rate hikes, a large-scale, rapid unwinding of carry trades remains unlikely due to the still-wide interest rate differential between Japan and other major economies.
Ayako Fujita, Chief Japan Economist at JPMorgan, stated that "even if the short-term rate differential narrows, the current spread is still sufficient to support carry trades. Only when Japan's long-term yields gradually converge with overseas rates will the scale of carry trades shrink, but that is a medium- to long-term trend."
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