The yen continued to edge lower in Tuesday's forex trading session, approaching a critical level for the dollar-yen pair that could reignite speculation about another intervention by Japanese authorities to support the currency. Despite a joint intervention by the US and Japanese governments, the yen's renewed approach toward 160 underscores the core reality that forex intervention can alter short-term capital flows but cannot change the fundamental drivers determining the exchange rate's center, such as fragile fiscal prospects, relative yield differentials, and monetary policy reaction functions.
Tuesday saw subdued market volatility due to a holiday in Tokyo, but forex traders are bracing for the yen's depreciation trajectory toward the 160-dollar level, a threshold that historically has halted further yen weakness. During the London trading session, the yen slipped 0.1% to 159.39 against the dollar. On Monday, with the dollar strengthening against most G10 currencies, the yen fell 1%, marking its worst single-day performance since mid-February. The yen has now retraced nearly half of the gains made since July 31, the day when Japan and the US conducted their first joint intervention since 1998 to aggressively support the yen.
Masayuki Nakajima, a senior strategist at Japanese banking giant Mizuho Bank, wrote in a report: "If the dollar-yen pair clearly breaks above the psychologically significant 160 level, concerns about intervention may further intensify." As illustrated, the yen's decline has reignited discussions about further government action, with the currency having erased nearly half of the gains from the July joint yen-buying intervention. The commitment by US Treasury Secretary Bessent to "do whatever it takes" to support the yen essentially masks a very limited intervention capacity.
This joint intervention helped the yen recover from an extreme low of around 164 per dollar in late July, a level near 40-year lows, and pushed it to a high of 155 per dollar earlier this month. Analysis by financial institutions based on Bank of Japan account data suggests that government authorities, coordinated by the US Treasury, may have spent approximately $34 billion on July 31 to intervene in the forex market to support the yen. The day before, Japanese authorities, under US coordination, may have deployed $53 billion; if officially confirmed, this would likely become the largest single-day currency intervention on record. However, as market participants refocus on fundamental drivers, the yen has gradually weakened again.
Despite warnings from Tokyo and Washington officials that they are prepared to act jointly again if necessary, the substantial interest rate gap between the US and Japan, concerns about Japan's fiscal and monetary policy outlook, and geopolitical uncertainties continue to pressure the yen. A more challenging issue for the Japanese government is that it faces not just a pure monetary policy problem, but a "rate-fiscal-exchange rate" trilemma. This creates a reflexivity where more frequent interventions might undermine policy credibility more than they help. Japan needs to raise interest rates to meaningfully compress the US-Japan yield gap, but higher Japanese rates would increase the financing costs for its ultra-high government debt system and term premiums on JGBs. If the government remains cautious about rapid BOJ tightening, the market will doubt how far it can actually raise policy rates.
Meanwhile, Japan's reliance on its foreign reserves to persistently buy yen could involve a global rebalancing of bond assets, potentially spilling over to already pressured US long-end yields—a key backdrop for the rare US participation in this coordinated action. Nearly $100 billion in intervention has failed to stop the slide toward 160! The yen's real "bearish engine" is not speculation, but the US-Japan interest rate differential.
The rare joint yen-buying around July 31 temporarily pushed the dollar-yen from around 163.99 down to near 155.20, but by August 11 it had already returned above 159, erasing about half of the gains. The real issue is that the Bank of Japan's July meeting maintained the policy rate at 1.0% by an 8-1 vote, with only Hajime Takata advocating for a direct hike to 1.25%. In contrast, US monetary policy rates and yields on 10-year or longer-term US Treasuries remain significantly higher. The short-end spread between the US and Japan is still sufficient to maintain the yield advantage of dollar assets and the economic basis for yen carry trades. BOJ Governor Kazuo Ueda's hawkish signal of "possibly accelerating rate hikes" has made a September rate hike a more realistic scenario for markets, but an anticipated rate hike is not equivalent to an already realized narrowing of the spread. As long as Japan's actual interest rate rises slower than the consensus expectations of financial market traders, the fundamental yield structure supporting a short yen position has not disappeared.
The US jobs data shock essentially proved that the real driver for sustained yen appreciation is not "how much yen the government bought," but whether the US-Japan interest rate differential undergoes a sustained compression. After the July US nonfarm payrolls unexpectedly fell by 23,000, far below the market expectation of an 80,000 increase, US short-end yields plunged, and the dollar-yen fell 1.1% to 156.68 on the same day. This was a classic fundamental repricing: reduced market expectations of Fed tightening led to lower US yields, a smaller dollar yield advantage, and a stronger yen. However, subsequent geopolitical risks in the Middle East pushed oil prices sharply higher, significantly boosting US inflation risks and Treasury yields. The dollar quickly regained its yield support, and the yen slid back toward 160.
The joint US-Japan intervention appears more like a tactic to increase short-selling costs, compress leverage, and create "two-way risk" during disorderly one-sided market moves, rather than a permanent shift in the dollar-yen equilibrium price. Therefore, while short positions contracted sharply after the joint intervention, if the BOJ cannot tighten monetary policy enough to keep pace with market expectations of real interest rates, these positions are fully capable of being rebuilt.
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