The yen has given back nearly half of the gains following the historic joint currency intervention by the United States and Japan. Investors point to the failure of the two central banks to present a unified stance, which has undercut the market-boosting effect of the intervention. Late July, after Tokyo and Washington coordinated market action, the yen rebounded from a forty-year low of 164 yen per dollar to around 155 yen per dollar, but it has since weakened again. On Monday, the yen fell 0.7% to 158.91 yen per dollar.
The latest data from the Commodity Futures Trading Commission shows that traders in the futures and options markets continue to bet on the yen's decline, although short positions have shrunk since the intervention. Van Luu, head of global solutions strategy at Russell Investments, commented, "The effect of the intervention is fading. Stronger measures are needed to drive sustained yen strength."
Investors suggest that without a simultaneous rate hike by the Bank of Japan, the forex intervention is unlikely to provide lasting support for the yen. They also believe the intervention was weakened by a lack of international coordination: the UK media reported last week that the US did not consult the European Central Bank before its rare sale of euros to support the yen. Guy Miller, chief market strategist at Zurich Insurance, stated, "The European Central Bank was not involved in this action, which is not a positive sign." He explained that coordinated action by central banks can "send a unified message to the market." This contrasts sharply with the coordinated intervention by the Group of Seven after the 2011 Japanese earthquake, which aimed to weaken the yen.
Market investors now focus on whether the Bank of Japan will be pressured to raise interest rates to support the yen. The yen continues to face pressure from multiple inflationary factors, including concerns over government fiscal spending and rising oil prices. Japan's Ministry of Finance conducted two unilateral interventions in April and May this year, but these only briefly stabilized the yen, with effects proving short-lived. Analysts at Goldman Sachs in Tokyo note that the Bank of Japan held its key rate at 1% at its July meeting, and the summary of opinions indicated that the overall risk bias has clearly shifted towards earlier rate hikes. The Bank of Japan's meeting minutes released on Monday quoted a policy board member stating, "Core consumer price index inflation is approaching 2%, and compared to the past, there is a greater need to focus on upside risks to prices. The pace of policy rate hikes may be faster than market expectations."
Traders now estimate about 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 shift in Bank of Japan policy, starting a more aggressive rate hike cycle from September, reaching 2% by the end of next year. If the yen breaks below the 160 yen per dollar level again—a threshold that has previously triggered Japanese forex intervention—it would further fuel domestic inflation. It would also heighten concerns among US policymakers about a strong dollar and the potential need for Japan to sell its massive holdings of US Treasury bonds to conduct large-scale forex intervention.
Some investors see similarities between the current market environment and August 2024, when bearish bets against the yen were high and the yen was deeply undervalued by traditional measures like purchasing power parity. At that time, the yen's sudden appreciation triggered significant volatility in global financial markets. Investors borrowed yen at low rates to make large bets on various global asset classes, a strategy known as the carry trade; a large-scale unwinding of these trades could cause severe disruptions in overseas asset markets. Van Luu pointed out that the current market's "extremely bearish" positioning on the yen shares some similarities with the 2024 environment. He added that if subsequent economic data or central bank policies force investors to simultaneously adjust their positions—betting on a dovish Federal Reserve while betting on a hawkish Bank of Japan—the market could replicate the sharp volatility seen then.
However, other analysts believe that even if the Bank of Japan accelerates its rate hikes, the probability of a large-scale, concentrated unwinding of carry trades remains low, given the still-substantial interest rate differential between Japan and other major economies. Ayako Fujita, chief Japan economist at JPMorgan, stated, "Even if the short-term interest rate spread narrows slightly, the gap will remain ample in the near term." She added that while carry trade volumes might shrink as Japanese long-term government bond yields gradually converge with overseas yields, this is a longer-term trend.
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