Japan's yen extended its recent decline, falling back to a level that could trigger a fresh round of intervention from government officials that has the potential to roil U.S. stocks during the traditional August lull.
Japan's Ministry of Finance has spent billions propping up the yen this year, including a record $53 billion in late July when it joined forces with the U.S. Treasury Department for the first time since 1998 to arrest the currency's yearslong slide .
Since then, however, the yen has given back around half of the gains it established over those two trading sessions in July, and was last trading at 159.17 against the U.S. dollar. A move toward the 160 level could test Japan's resolve and possibly stoke another round of yen purchases, potentially in concert with the Treasury.
"The renewed weakness in the yen does not seem particularly surprising, as the impact of intervention tends to be short-lived without changes in underlying fundamentals, in particular interest rate differentials and fiscal policy," said Marco Casiraghi, senior economist and strategist at Evercore ISI.
"But the rapid pace of the recent depreciation of the yen intensifies questions about whether and how the U.S. and Japan will follow up on their commitment to support it," he added.
Broader yen support could come from the Bank of Japan, which is expected to lift its benchmark lending rate by a quarter of a point in September as inflation pressures tied to the U.S. war with Iran, which has stoked energy import costs, continue to quicken.
However, the U.S. is also debating the need for rate hikes, given the late summer surge in global crude prices and the ratcheting of tensions between Washington and Tehran over control of the Strait of Hormuz.
Rate hikes from both central banks would likely leave the interest-rate differentials between the two economies unchanged, creating more impetus for investors to extend their yen carry trades into the autumn.
In that scenario, investors borrow yen at low base rates, convert the cash to dollars and put the money to work in U.S. markets. Data from the Bank for International Settlements suggest $1.3 trillion and $1.7 trillion is deployed as a result.
However, unwinding that cash carries massive risks.
A government-led intervention in the summer of 2024, for example, drove the yen nearly 3% higher against the dollar in July, and stoked the biggest single-day decline for Japanese stocks since 1987. It also triggered a spike in U.S. market volatility, with the S&P 500 falling 6.1% over a three-day period in August.
That has traders looking at the 160 level for the yen with greater interest, particularly now that spring and summer interventions have had only minimal impact.
A sustainable move past 160, without joint U.S.-Japan action, could allow markets to "interpret the absence [renewed] of intervention as another signal that the U.S. is reluctant to see further sales of dollars to support the yen, said Casiraghi. "The result could invite additional market pressure that would test the commitment to a stronger yen."
Bond markets, however, might be the more pressing issue for the U.S., given the summer spike in Treasury yields which has added 30 basis points to 10-year Treasury note yields, with the paper touching a fresh 18-month high of 4.73% earlier this week.
Japan, the biggest foreign holder of Treasuries with just over $1.4 trillion in its coffers, will normally sell those bonds to fund its yen purchases, putting added upward pressure on yields as U.S. debt, deficit, and tariff issues return to the fore.
Treasury Secretary Scott Bessent is attempting to soothe those concerns by expanding a repo facility, t he Foreign and International Monetary Authority, which will allow Japan to park bonds with the Federal Reserve, without selling them, in order to get cash to buy and support the yen.
"We would encourage it to be upsized in the coming months," Bessent said late last month. "We strongly support Japan's decisive market and monetary steps to correct the substantial undervaluation of the yen."
The yen's broader weakness, however, and the specter it holds over U.S. markets, is likely to remain a permanent fixture.
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