Goldman Sachs says Japan has enough cash on hand to sustain several more rounds of yen intervention on the scale seen last month, with the nation also potentially able to secure funding support from the Federal Reserve.
According to Goldman Sachs estimates, Japan holds roughly $200 billion in cash or high-liquidity equivalents within its approximately $1 trillion foreign exchange reserves, a sum roughly equal to the size of July's intervention operations. Karen Fishman, a Goldman Sachs research strategist, said on Wednesday that authorities have sufficient resources to repeat the record-breaking transactions seen recently. She noted that while they are unlikely to use all of the funds, the availability demonstrates ample capacity to continue intervening if they choose to do so.
Beyond its own cash reserves, Goldman Sachs specifically highlighted the Federal Reserve's Foreign and International Monetary Authorities (FIMA) repurchase facility. This tool allows central banks to use their holdings of U.S. Treasuries as collateral to borrow U.S. dollars from the Fed, enabling them to quickly raise intervention funds without selling U.S. debt on the secondary market. Fishman explained that through this mechanism, Japan could theoretically convert its entire $1 trillion reserve stockpile, including non-cash U.S. Treasury holdings, into usable liquidity. Japan's Ministry of Finance has publicly stated its intention to use this facility as appropriate. Given that the U.S. has coordinated yen intervention with Japan for the first time since 1998, Fishman said this claim carries a degree of credibility. Additionally, following the 2011 earthquake, Japan and the U.S. coordinated with other G7 nations to curb yen appreciation.
This prospect has significantly shifted market sentiment. Prannit Shah, Goldman Sachs' head of FX options trading, said client bullishness toward the yen has markedly increased after they learned last week about Japan's ability to deploy its trillion-dollar reserves via the Fed's facility for intervention.
Reviewing last month's events, Japan intervened jointly with the U.S. in the currency market for the first time since 1998, deploying up to $85 billion over two trading days, a scale second only to the record set after the 2011 Fukushima nuclear disaster. Before the joint intervention, the yen had fallen to 164 per U.S. dollar, hovering near its lowest level in 40 years. The operation initially pushed the yen to the 158 level, breaking through the 200-day moving average. However, the intervention's effects are fading: on Wednesday, the yen retreated to around the key 160 mark against the dollar, paring roughly half of the gains from the intervention. Fishman described such intervention as not a sustainable solution, ultimately just buying time. She noted that Japan's unilateral intervention in April and May served as a cautionary tale, with the yen sinking back to 40-year lows within months after a brief boost.
Shah indicated that whether Japanese authorities will intervene again likely depends on Japan-U.S. interest rate differentials, which remain the primary driver of yen weakness. Late Wednesday, the 10-year U.S. Treasury yield stood at 4.690%, compared to Japan's 10-year yield at 2.839%, offering significant incentive for investors to hold U.S. bonds. On the Japanese side, markets currently price in a 65% probability of a 25 basis point rate hike by the Bank of Japan in September, with about 40 basis points of tightening expected by year-end. Fishman said if the Bank of Japan does not raise rates in September, it would again put downward pressure on the yen. Shah added that the BoJ would need to hike faster than markets expect to alter the carry trade dynamics that have driven the yen down about 45% over the past five years.
On the U.S. side, Shah said weak economic data could ease yen pressure by weakening the case for further Fed rate hikes and reigniting market expectations for another Japanese intervention. He specifically highlighted the situation in July 2024, when the BoJ and Ministry of Finance executed one of their most effective interventions, coinciding with a weaker-than-expected U.S. CPI print, followed by a disappointing nonfarm payrolls report a few days later. He said that if U.S. economic data comes in unexpectedly weak, he expects markets to start raising intervention expectations later this week. U.S. inflation data released on Wednesday met expectations, with the consumer price index rising 0.1% in July, consistent with the consensus forecast, while the annual inflation rate fell to 3.4% from 3.5% in June. Treasury yields declined after the report.
In summary, Goldman Sachs believes Japan still possesses ample ammunition for currency intervention, whether through $200 billion in cash reserves or the theoretical ability to mobilize its entire $1 trillion in reserves via the Fed's FIMA facility, providing authorities with powerful policy options. However, intervention remains a stopgap measure, and the yen's long-term path will depend on the evolution of U.S.-Japan interest rate differentials and the actual trajectory of both countries' monetary policies. The Bank of Japan's September policy meeting will be a key juncture for markets to judge the sustainability of the yen's current rally. Options pricing suggests traders remain wary of another sharp yen spike, and this fear itself may curb new selling. Shah noted that the high premium for short-term yen call options indicates markets are still on guard against a sudden jump in the yen, making investors reluctant to sell the yen as it approaches the 160 level. He stated that if the spot rate really approaches 160, and the market has already fully priced in the risk of a sharp reversal, continuing to sell the yen poses a genuine risk.
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