The impact of the yen intervention is fading. After rallying from a near 40-year low of 164 yen per dollar to around 155, the yen has softened again, currently trading at 159.28. Market attention has shifted from the U.S. Treasury Secretary to the Bank of Japan, with the timing of an interest rate hike becoming the core battle in the forex market.
According to a Tuesday report from the Financial Times, investors widely believe the joint intervention lacked a "unified voice," diminishing its market impact — the European Central Bank was not notified in advance and could not coordinate. Van Luu, Head of Global Solutions Strategy at Russell Investments, stated that the intervention's effect is fading, and "more steps" are needed to create sustained support.
The market's key judgment is becoming clear: without a rate hike from the Bank of Japan, any currency intervention will be difficult to sustain. This expectation is reshaping trader pricing logic and directly pressuring the Bank of Japan's policy decisions.
Intervention Shows Limited Impact, Yen Under Pressure Again
The joint U.S.-Japan intervention set a historical precedent, but its market impact has been significantly diluted. After rebounding from a 40-year low of around 164 to near 155, the yen has recently fallen back below the 160 level, touching a low of 159.36 on Monday.
Guy Miller, Chief Market Strategist at Zurich Insurance, noted that the ECB's exclusion from the coordination mechanism "doesn't help the market," as central bank coordination could send a signal of a "unified voice." This stands in stark contrast to the 2011 G7 coordinated intervention to weaken the yen after Japan's earthquake.
Latest data from the U.S. Commodity Futures Trading Commission shows that traders in futures and options markets still hold short yen positions, although position sizes have shrunk after the intervention. Japan's Ministry of Finance previously provided only temporary support with unilateral interventions in April and May, and historical experience has further dampened market expectations for the current intervention's sustainability.
Rate Hike Expectations Intensify: September or December?
The Bank of Japan's next move is the market's focus. The current base rate is 1%, while the Federal Reserve's rate range is 3.5% to 3.75%, with the interest rate differential being the root cause of persistent yen weakness.
Minutes from the Bank of Japan's July meeting show one member explicitly stated that, given core CPI inflation is near 2%, "more attention should be paid to upside risks to prices, and the pace of policy rate hikes may be faster than market expectations." Goldman Sachs analysts in Tokyo concluded that risks are clearly skewed toward earlier rate hikes.
Traders are currently pricing in about a 50% probability of a 25-basis-point rate hike by the Bank of Japan in September. Citigroup analysts predict a "policy regime shift," with the Bank of Japan adopting a more aggressive pace of hikes starting in September, raising rates to 2% by the end of next year.
However, several institutions are cautious about a September hike. Masayuki Nakajima, an analyst at Mizuho Securities, believes the threshold for action in September remains high from a domestic economic perspective. Japan has experienced decades of low growth, low inflation, and ultra-low rates, and concerns persist about the impact of rate hikes on mortgage-holding households and small businesses. He suggests the Bank of Japan favors a gradual normalization, hiking by 25 basis points and then observing for about six months, making December the most natural timing and the base case for Mizuho's Tokyo macro team.
Barclays analyst Naohiko Baba and his team also have October as their base case but say they are "on alert for a September hike." They point out that the Bank of Japan's summary of opinions, to be released on August 10, will be crucial — if multiple members explicitly express support for an early rate hike, the probability of a September move will rise significantly.
Notably, if the Bank of Japan hikes in September, the interval between the two rate hikes would shorten to about three months, a pace not seen since the asset price bubble contraction phase of 1989-1990, marking a historic policy shift.
Dual Risks of Yen Undervaluation and Carry Trades
Calculations by Costas Milas, a professor at the University of Liverpool, show the yen is currently undervalued by about 21%, with the divergence between the exchange rate and interest rate differentials significantly exceeding normal ranges. This is a key reason the U.S. and Japan have characterized the market as "disorderly."
If the yen falls back below 160, it would further heighten domestic inflationary pressure in Japan, deepen U.S. policymakers' concerns about an excessively strong dollar, and raise market worries about whether Japan might need to sell its vast holdings of U.S. Treasury bonds to fund larger-scale foreign exchange intervention.
Some investors are drawing parallels between the current market conditions and August 2024, when a sudden sharp rise in the yen triggered significant volatility in global financial markets. Van Luu noted that with concentrated short yen positions and low valuations, the risk of a rapid unwinding of carry trades cannot be ignored if the Federal Reserve turns dovish in sync with the Bank of Japan turning hawkish.
However, Ayako Fujita, Chief Japan Economist at JPMorgan, holds a more moderate view. She believes that even if the Bank of Japan accelerates its pace of rate hikes, short-term interest rate differentials will remain wide enough, making the risk of a large-scale, rapid unwinding of carry trades relatively limited. The convergence of long-term Japanese government bond yields with those of other major economies is a "longer-term story" and does not pose a systemic shock in the short term.
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