Even though there was an intervention involving the US last week, analysts remain pessimistic about a sustained yen rebound. The fundamental outlook for the yen remains "weak." HSBC added that a structural shift in the Bank of Japan's policy framework is crucial for a lasting yen recovery.
US support for Japan's efforts to boost its soft currency has driven a significant yen rally in recent trading sessions, with the yen appreciating by about 5% before giving back some gains on Monday. The joint intervention pushed the yen to 157 per US dollar, recovering from a 40-year low just above 163 yen. However, analysts are not very hopeful about a sustained currency rebound, as its fundamentals remain under the spotlight.
UBS strategists Chen Deneng and Dominic Schnider wrote on Monday, "Japan's policy mix is still unlikely to produce sustained yen strength. With the Bank of Japan expected to continue gradual policy normalization and real interest rates staying negative, the yen is more supported by intervention risk than by domestic monetary fundamentals."
US involvement in supporting the yen follows previous interventions by Japan in 2022 and 2024, where the Bank of Japan sold US dollars to buy yen. It is understood that a similar approach was taken this time, but reports suggest that the US Treasury may have bought yen by selling euros instead of US dollars. The US dollar's reaction on Monday was relatively subdued.
Chris Turner, head of markets at ING, noted that the dollar's resilience "may be attributed to the unresolved question of whether the Federal Reserve will raise interest rates in September." The expectation of rate hikes implies higher yields, potentially boosting demand for US Treasury bonds internationally.
HSBC added that a structural shift in the Bank of Japan's policy framework is key to a sustained yen rally. Analysts wrote in a Monday report, "Unless we see faster rate hikes from the Bank of Japan, a clearer government stance on the yen—rather than saying yen weakness has both positive and negative impacts—and a reduction in fiscal expansion ambitions, we remain unconvinced about a downward trend in the US dollar-yen pair."
Could intervention backfire? Robin Brooks, a senior fellow in economic studies at the Brookings Institution, wrote in a Substack article that the joint intervention could ultimately weaken rather than strengthen confidence in the yen. He added that if Washington buys yen by selling euros instead of US dollars, investors might infer that US officials are trying to avoid Japan funding the intervention by selling US Treasury bonds.
Reports that the US bought yen by selling euros rather than dollars surprised markets, as joint interventions are traditionally funded through dollar assets. Brooks stated, "This workaround, in my view, undermines the effectiveness of US involvement, as it inevitably leads the market to question why the US did not fund the yen purchase with dollars."
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