Following the rare joint intervention in the foreign exchange market by the United States and Japan, expectations for the yen's long-term trajectory are beginning to shift. Stephen Jen, CEO of asset management firm Eurizon SLJ Capital, believes this coordinated action could serve as a pivotal moment for the yen market, suggesting the dollar-yen exchange rate may have already peaked. The likelihood of the yen sliding back to the multi-decade lows seen earlier has notably diminished.
In a note to clients on Tuesday, Jen and the firm's economist and portfolio manager, Joana Freire, argued that neither the U.S. nor Japan is likely to back down easily, making it highly probable that USD/JPY "has reached its peak." The core message from the intervention, they emphasized, is that both nations are actively seeking to drive the dollar-yen exchange rate lower.
This joint operation, the first of its kind since 1998 where the U.S. and Japan bought yen together, aimed to reverse the currency's persistent depreciation. Recently, the wide interest rate differential between the U.S. and Japan, with American rates staying higher for longer, has continuously encouraged Japanese investors to allocate funds to overseas assets, putting downward pressure on the yen. The dollar-yen pair briefly approached 164 last month, marking a low point not seen in decades, before the intervention triggered a significant rebound.
Data from the Commodity Futures Trading Commission (CFTC) as of August 4 indicates that hedge funds have been reducing their short positions against the yen, suggesting speculative capital is reassessing the risks of betting against the Japanese currency. However, the gains from the intervention have partially faded, with the dollar-yen pair now trading around 159.30, still below the near-164 peak from last month.
U.S. Treasury Secretary Scott Bessent has previously stated America's willingness to support Japan, reinforcing market expectations that further joint action could be taken. Some on Wall Street believe the U.S. involvement extends beyond stabilizing the yen, possibly linked to the U.S. Treasury market. If the yen were to depreciate sharply and uncontrollably, Japanese authorities might be forced to sell their U.S. Treasury holdings and other dollar-denominated assets to fund interventions, potentially increasing supply pressure in the bond market and driving up U.S. long-term interest rates. Therefore, preventing a disorderly yen collapse aligns with America's interest in maintaining stable financial markets, especially as it faces its own pressures from high bond yields and borrowing costs.
Eurizon holds a more optimistic view for the yen's medium-to-long-term prospects. The firm projects the yen could eventually strengthen to around 125 yen per dollar, though it did not provide a specific timeline for achieving this target. A move from the current level of 159.30 to 125 would represent an appreciation of over 20%, indicating that the firm sees the joint intervention as more than a short-term market operation and potentially a sign of deeper changes in the exchange rate policy environment.
Jen and Freire stated that the market has long needed to adjust its expectations for the dollar-yen trajectory. In their view, the most important takeaway from the joint intervention is the clear signal that both the U.S. and Japan are determined to push the dollar-yen down and prevent further significant depreciation of the yen. Nonetheless, recent price action shows the intervention has not fully reversed the yen's depreciation pressure. The pair's return to the 159-level suggests that interest rate differentials, capital flows, and market expectations of U.S. and Japanese monetary policy will continue to influence the exchange rate. Going forward, market focus will be on whether the U.S. and Japan intervene again, and whether changes in their monetary policies can fundamentally narrow the interest rate gap.
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