The yen has given back roughly half of its gains within less than two weeks after experiencing its first joint U.S.-Japan intervention in nearly three decades, signaling that the fundamental factors driving the currency's prolonged weakness remain intact and short-term policy actions are struggling to alter market trends.
The yen has now slipped back to around 159 against the dollar, after briefly rising to near 155 following the joint intervention triggered when it breached the 163 mark. "Intervention spooks the market, but it cannot stop the financial laws from working," said Jesper Koll, expert director at Monex Group, noting that as long as Japan's cost of capital remains below overseas investment returns, carry trades will re-emerge.
Currently, Japan's financing costs are notably lower than those in the U.S. and other major markets, allowing investors to borrow cheap yen and reinvest in higher-yielding dollar-denominated assets. This carry trade model has long driven capital flows overseas. Recent rises in U.S. Treasury yields, coupled with higher oil prices, have added further pressure on Japan. As a major energy importer, Japan faces higher import costs, which undermines the yen's appeal.
Masahiko Loo, senior fixed income and FX strategist at State Street Global Advisors, stated that the joint intervention has successfully reduced speculative sentiment and increased the risk of shorting the yen, but it has not eliminated the yield advantage that supports the dollar. Currently, the U.S. 10-year Treasury yield stands at approximately 4.686%, while Japan's 10-year yield is around 2.846%, leaving a significant gap. "This is more about curbing speculation than changing fundamentals," Loo remarked.
Monex's Koll believes that what truly disappointed investors was not the intervention itself, but the insufficient tightening measures previously taken by the Bank of Japan. This has fueled speculation that the central bank may be constrained by risks within the banking system and the immense pressure of government debt. John Wood, Asia chief investment officer at Lombard Odier, suggested that this intervention might only have a "limited temporary effect," and that the Bank of Japan needs at least two more rate hikes to truly stabilize the yen. If Japanese rates fail to rise further or U.S. rates do not decline significantly, investors will still have incentives to move capital to overseas assets.
However, some institutions argue that the yen's weakness is not purely a matter of interest rates. Crédit Agricole CIB pointed out that Japan faces an "investment capacity asymmetry" issue. The U.S. AI industry and related infrastructure investments continue to attract global capital, while Japan's government and private capital investment plans have yet to fully deliver results. The institution believes that the key to truly improving the yen's trajectory is not just rate hikes, but expanding investment to enhance the appeal of Japanese assets.
The 160 level has become a key psychological threshold for the market. State Street Global Advisors' Loo indicated that if the yen quickly breaks below 160 again, officials may re-intervene in the market. "If there's a rapid or disorderly move in the exchange rate, I wouldn't rule out another intervention," he said.
U.S. Treasury Secretary Scott Bessent has previously stated that the U.S. is willing to continue supporting Japan in stabilizing the yen. The market believes that the U.S. is concerned that if Japan sells a large amount of U.S. Treasuries to raise dollars for intervention, it could push up long-term U.S. interest rates, so it hopes to reduce pressure through other tools. The Federal Reserve's Foreign and International Monetary Authorities Repo Facility (FIMA Repo Facility) is seen as a potential support channel, allowing Japan to exchange U.S. Treasuries for dollar liquidity, thereby reducing the need for direct Treasury sales.
Stephen Jen, CEO of Eurizon SLJ Capital and founder of the "Dollar Smile Theory," affirmed the significance of the joint U.S.-Japan intervention on Tuesday, calling it a "watershed event." "USD/JPY has likely peaked as neither the U.S. nor Japan will give up or concede to the market," Jen and his firm's economist and portfolio manager Joana Freire wrote in a client note on Tuesday. "Resistance is futile." Eurizon expects that over the long term, the dollar-yen pair could move toward the 125 level. "Market expectations need a major recalibration. We believe the most important message from this joint intervention is that both the U.S. and Japan are determined to push USD/JPY lower," they stated.
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