The yen is trading just shy of the critical 160 level against the US dollar, despite reports that the government led by Prime Minister Shigeru Ishiba is backing the Bank of Japan's case for raising interest rates.
On Thursday, the yen held steady around 159.36 per dollar, lingering near a point that has historically triggered government intervention to support the currency. According to sources familiar with the matter, the next rate adjustment is likely to occur in September or October. They added that the BOJ's concern over "a weak yen driving up prices" is converging with the government's aim to "strengthen the effectiveness of recent joint US-Japan currency intervention," aligning both parties on the need for a rate hike in the near term.
Investors noted that the news had minimal impact on the yen, as the market had already priced in expectations of a BOJ rate increase. The yen has been under persistent pressure due to Japan's significant interest rate differential with the United States and its heavy debt burden. Masayuki Nakajima, a senior strategist at Mizuho Bank, remarked: "As a result, market focus has shifted from 'whether the BOJ will hike in September' to 'how fast the tightening pace will be thereafter.'"
Previous discussions about a BOJ rate hike failed to sustain the yen's upward momentum. Meanwhile, Japan's 10-year government bond yield stood at 2.89% on Thursday, not far from the 30-year high hit last month. The Prime Minister's Office stated in an email: "We believe that specific monetary policy measures, including interest rate hikes, should be left to the BOJ's discretion."
Francesco Pesole, a strategist at ING, suggested that while he expects the yen to move back toward the 160 level again, expectations of looser US monetary policy should provide support in the coming weeks. "In my view, the current issue is that the market is still too hawkish on the Fed," he said. Shusuke Yamada, head of FX and rates research at Bank of America Japan, noted that "after the coordinated intervention with the US on July 31, market confidence in Japan's commitment to defending the yen strengthened, but that credibility seems to have faded over the past week as the dollar-yen rebounded without any intervention."
Goldman Sachs senior FX strategist Karen Fishman stated that Japan has enough cash to conduct several more rounds of yen-buying operations on the scale of the recent joint intervention. Goldman Sachs estimates that the Japanese government spent approximately $85 billion in the first two days of last month's action. That marked Japan's largest two-day intervention on record, second only to October 2011, when Tokyo stepped in after the Fukushima disaster.
The Ministry of Finance said it would use the Federal Reserve's FIMA repo facility to borrow dollars using its holdings of US Treasuries as collateral. Japan has roughly $1 trillion in foreign exchange reserves, of which about $200 billion is in cash or cash equivalents. Fishman commented, "Realistically, they are far from running out of that money, but I think this highlights that they have enough ammunition to keep intervening if they want." However, she warned that intervention is not a sustainable solution, calling it "ultimately just buying time," and noted that after Tokyo's unilateral interventions in April and May, the yen returned to 40-year lows within months.
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