At the end of last month, the U.S. and Japan jointly intervened to support the yen, with a record-breaking scale. However, the intervention's effect is fading: the yen has already given back about half of its gains, approaching the 160 level again. The core question for the market follows: will Tokyo step in again?
Japan holds over $1 trillion in foreign exchange reserves and can access the Fed's tools to convert all of them into cash. Goldman Sachs believes this provides Tokyo with ample ammunition for further yen intervention.
How Much Ammunition?
Goldman Sachs estimates that of Japan's roughly $1 trillion in dollar reserves, about $200 billion is held in cash or cash equivalents, roughly the size of last month's intervention.
On August 12, Goldman Sachs research strategist Karen Fishman said on the bank's podcast: "They already have enough funds on hand to carry out several more rounds of intervention of the scale we just saw—and that was near a historical record."
She added: "In reality, they won't use all of their funds, but this shows one thing: if they are willing, they have ample capacity to sustain intervention."
More critically, the Japanese Ministry of Finance plans to use the Federal Reserve's FIMA repo facility. This tool allows central banks to borrow U.S. dollar cash against their holdings of U.S. Treasury bonds without selling them on the secondary market. This means, in theory, all $1 trillion in reserves could be converted into usable liquidity.
Market sentiment shifted quickly with the news. Goldman Sachs' head of FX options trading, Praneet Shah, said that last week, clients' "bullish sentiment on the yen has clearly warmed up," precisely because the FIMA facility makes the $1 trillion intervention potential tangible.
Intervention Credibility Rises, but Effectiveness Questioned
Japanese officials have publicly stated they will not hesitate to step in again if necessary. Fishman believes this statement "has a certain degree of credibility"—because the U.S. joined Japan in intervention last month, the first time since 1998.
Goldman Sachs estimates that in the first two days of last month's intervention, Tokyo spent about $85 billion, the largest two-day intervention on record, aside from Japan's market entry after the 2011 Fukushima nuclear disaster.
After the intervention, the yen briefly broke above its 200-day moving average of 158. However, Fishman stated that intervention is "not a sustainable solution... it's ultimately just buying time." She noted that after Japan's unilateral interventions in April and May, the yen returned to a 40-year low within months.
Triggers for the Next Intervention
Goldman Sachs believes there are two core variables determining whether Tokyo will act again: the pace of the Bank of Japan's interest rate hikes and U.S. economic data.
Currently, the interest rate differential between Japan and the U.S. remains wide. The 10-year U.S. Treasury yield is about 4.690%, while Japan's equivalent bond yield is 2.839%, a gap of nearly 190 basis points. This gap continues to attract capital flows into U.S. dollar assets, creating fundamental pressure for yen depreciation.
Shah said the Bank of Japan needs to "raise interest rates faster than expected" to truly change this interest rate differential—which has driven the yen's cumulative 45% depreciation over the past five years.
Current market pricing shows about a 65% probability of the Bank of Japan raising rates by 25 basis points in September, with a cumulative total of about 40 basis points of hikes for the year. Fishman warned: "If the rate hike fails to materialize in September, it will create new downward pressure on the yen."
On the U.S. side, Shah pointed out that if economic data weakens, it would reduce the case for further Fed rate hikes, thus easing pressure on the yen and rekindling market expectations for intervention. He specifically cited the July 2024 case, when the Bank of Japan and the Ministry of Finance's intervention coincided with a weaker-than-expected U.S. CPI report, followed by soft non-farm payrolls, making the intervention's effect particularly notable.
"Once data surprises, the market will significantly increase expectations for another intervention later this week," Shah said.
On Wednesday, U.S. July CPI data met expectations: up 0.1% month-over-month, with the annual rate falling from 3.5% to 3.4%. Treasury yields edged down after the data release.
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