The Japanese yen experienced multiple sharp spikes between July 30 and August 1. By the end of this week, the USD/JPY pair had fallen from a recent high of 163.9 to 157.4, representing a 4% appreciation of the yen. The price action this week suggests official intervention, with USD/JPY dropping vertically in minutes on several occasions and trading volumes expanding significantly. According to estimates from Bloomberg and others, the initial round of yen-buying intervention on July 30 may have reached 8.45 trillion yen (approximately $52.8 billion).
Why did the Ministry of Finance choose this moment to act? The core logic behind the current timing is "riding the momentum." First, the U.S. dollar index has shown signs of weakening. The July FOMC meeting did not raise interest rates, and Waller's dovish comments, combined with slightly weaker-than-expected GDP and PCE data, have cooled rate hike expectations and increased skepticism toward the Fed, creating a window for Japanese intervention. Second, while the Bank of Japan kept its policy rate unchanged on Thursday, Governor Ueda signaled a more hawkish stance in his press conference, with markets now expecting a possible rate hike between September and October. Third, both the U.S. Treasury and Bessent have publicly stated their "concern that the yen is excessively undervalued." This explicit endorsement from the U.S. has significantly eased the external constraints on Japan's unilateral intervention. The Ministry of Finance's decision to intervene at this time offers high cost-effectiveness. Notably, during the previous intervention on April 30, the Ministry also chose to act one day after the FOMC meeting, which had similarly large internal divisions. The Ministry's timing may involve a strategic calculation to capitalize on the fallout from the Fed's policy decisions and their internal disagreements.
Is the United States involved? How and why? According to reports from CCTV Finance and other media, the U.S. may have effectively participated in a joint intervention to support the yen, and the Japanese Ministry of Finance has publicly stated that it has received "more than verbal support" from the U.S. In January of this year, the U.S. Treasury also conducted foreign exchange rate inquiries with banks, which was interpreted as a potential joint intervention, but no concrete action was taken, serving only as a "signal." In this round, the likelihood of actual U.S. involvement is higher. Reports from CCTV Finance and other outlets suggest that the U.S. Treasury and the New York Fed may have sold euros and bought yen. From the market perspective, around 9:30 PM on the 31st (the start of the New York session), the dollar-euro exchange rate saw a clear jump. Simultaneously, both the euro-yen and dollar-yen rates fell, and the cross-rate movements point to the possibility of such operations. Why would the U.S. help stabilize the yen? Speculative reasons: When Japan intervenes in the currency market, it must sell U.S. dollar assets and buy yen, which can negatively impact U.S. Treasuries. By providing verbal support and selling euros, the U.S. can help reduce the need for Japan to sell its dollar assets.
Will the Ministry of Finance intervene again? Compared to previous interventions, the scale of this current operation is not extreme (especially with U.S. assistance), leaving room for further action. Additionally, the yen's gains this week have already been significant, clearly exceeding the levels seen in April this year, providing a basis for a temporary wait-and-see approach. The Ministry is expected to monitor market trends before deciding on its next move. If USD/JPY trades in a volatile or slowly rising trend toward 160 at the start of next week, the probability of further intervention is low. Conversely, if the pair experiences a disorderly upward surge, the possibility of sustained intervention exists.
What is the outlook for the yen? The impact of standard intervention on the yen's trajectory is not lasting. As noted in our previous report, "4 Questions on Yen Weakness: Global FX Tracking (1)," historical experience shows that the effects of currency intervention are typically short-lived, with the yen often reverting to its original trend and giving back most of its gains within two weeks. However, the actual involvement of the U.S. may provide the yen with more sustained support. A key difference this time is that the U.S. has taken action at the trading level, moving beyond mere verbal support and inquiries, which could create a stronger "credible threat" for the market. An example is the intervention in March 2011, when the U.S. also stepped in to counter excessive yen appreciation, and the impact was considerably more prolonged. Overall, the yen may fluctuate in the 155-160 range in the short term, but it is likely to return above 160 in the second half of the year, unable to reverse its long-term weakening trend.
How should the impact of yen appreciation be assessed, and is market risk high? This can be understood from several dimensions. First, short-term pressure on U.S. Treasuries could increase. U.S. Treasuries are already under pressure from factors like oil prices, inflation, and credibility concerns about Waller. Japan's intervention, which inevitably involves selling dollar assets, could further weigh on U.S. bonds. Second, the weakening of the U.S. dollar could provide some support for the liquidity of global risk assets, such as technology stocks. This transmission channel requires the condition that no systemic unwinding of carry trades occurs. Generally, a strong dollar is unfavorable for various asset classes. Third, a full-scale unwinding of carry trades is not our base case, but if the yen unexpectedly appreciates in a trend-like manner, it could pose a significant shock. Based on our earlier analysis, the yen is expected to be volatile in the short term and weaken in the medium term, making the probability of a carry trade unwind low. The current macro environment differs significantly from mid-2024: at that time, the Fed began a series of rate cuts, and the Bank of Japan surprised with a rate hike, reversing yen depreciation expectations, leading to a carry trade unwind that severely impacted global markets. Currently, the Fed is relatively hawkish, and the Bank of Japan is cautious about rate hikes, relying only on fiscal intervention to try to maintain stability. However, it is important to note that short yen positions are currently large, comparable to levels seen in 2024. If unexpected factors emerge and the yen appreciates in a trend, the market risks from a carry trade unwind should not be underestimated.
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