Government interventions, such as currency buying and bond buybacks, are supposed to reassure markets. But lately, they've been packing a limited punch.
Each fix from the government brings a temporary calm before pressures show up somewhere else
First it was downward pressure on the Japanese yen. Then it was upward pressure on U.S. bond yields. Now, Japan is back in the spotlight - and the fix looks the same: Policymakers look ready to step in to hold the market steady by the hand.
The strategy has begun to look like its own risk. The Japanese yen (JPYUSD) reversed nearly a month of weakness and bounced to a seven-month high against the U.S. dollar on Thursday. What triggered the reversal? Market speculation that authorities might be quietly intervening again in foreign-exchange markets ahead of a potential interest-rate hike from the Bank of Japan later in September.
The Japanese yen climbed nearly 2% Thursday to end the session at 155.80 against the dollar, according to Dow Jones Market Data. Earlier this week, the currency crossed the 160-per-dollar mark, which is often seen as a key threshold increasing the chance of intervention.
The Ministry of Finance in Japan did not immediately respond to MarketWatch requests for comment.
Government interventions, such as currency buying and bond buybacks, are supposed to calm markets. But lately, they've been packing a limited punch.
"The yen interventions are just stopgap measures," said Eric Wallerstein, chief market strategist at Clocktower Group. "The Japanese government is trying to buy time this entire year until the Iran war ends and higher oil stops putting pressure on the yen."
Markets can still expect "some repatriation" of Japanese funds from abroad to support the yen on the heels of any fresh intervention, Wallerstein said. But until actual capital starts flowing back to Tokyo, it's really difficult for the currency to gain sustained strength, he told MarketWatch.
It was just weeks ago that Japan spent a record 15.4 trillion yen, or about $96 billion, between July 30 and Aug. 26 to support its currency, which had tumbled to a 40-year low.
The action included a rare coordinated yen-buying effort with the U.S. government - and sparked a letter to Treasury Secretary Scott Bessent from Sen. Elizabeth Warren, a Democrat from Massachusetts, who asked for justification for supporting the Japanese yen.
Meanwhile, a growing worry in markets is that government interventions are a way for policymakers to kick significant problems down the road, a way to manage market symptoms without tackling underlying policy issues.
The U.S. bond market saw a similar story play out only a few weeks ago, when Bessent's plan to at least double buybacks of long-dated government bonds only briefly paused the Treasury market selloff.
"It's a little bit of a shell game," said Loren Moran, fixed-income portfolio manager at Wellington Management. It's a fairly small amount of buybacks relative to the $31.5 trillion Treasury market, she noted, and it "doesn't really solve the core of the issue."
The reason interventions sometimes create more panic than stability in markets is that when a government takes sudden action, it can accidentally signal underlying economic problems might be worse than markets realize. So, instead of feeling relieved, investors can rush for the exits. And because markets dislike uncertainty more than bad news, investors start pricing in the risk of further unexpected rule changes from the government.
Global financial markets might look like they are lurching from one problem to the next. But in reality, they are caught in a loop, with high oil prices from the Iran war setting off a chain reaction in markets already looking fragile on their own.
U.S. Treasurys BX:TMUBMUSD10Y BX:TMUBMUSD30Y and Japanese government bonds BX:TMBMKJP-30Y were both under pressure before elevated energy prices entered the picture with the start of the Iran war in late February. Years of growing deficits in Washington and Tokyo have left longer-term bonds sensitive to any new shocks. In addition, rising oil prices have revived inflation fears and increased the odds of interest-rate hikes across the globe.
"Frankly, the underlying problem is oil prices are still high, and it's myopic at this point to look at yields as a result exclusively [of] fiscal concerns by investors," Wallerstein said.
"If oil comes down, and once rates fall a bit, fiscal concerns mechanically fall, as well, because your debt outlook is a function of what rates you are paying, as well as what the growth trajectory looks like," he added. "These three very big things to contend with - they're perfectly placed for yields to rise and for certain currencies to weaken."
Related: The ugly math on interest expenses, yields and the $40 trillion U.S. national debt
But for now, aside from a potential rate hike from the Federal Reserve and the Bank of Japan in September, the oil (BRN00) (CL00) and deficit problems remain unresolved.
The ICE U.S. Dollar Index DXY, a gauge of the greenback's strength against a basket of major currencies, was off 0.6%, according to FactSet data.
Joy Wiltermuth contributed
-Isabel Wang
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