The yen has fallen back toward the 160 mark against the US dollar, reversing much of its previous rally after the first joint US-Japan currency intervention since 1998. This shift has heightened speculation about potential further efforts to bolster the currency.
Back on July 31, the US and Japan coordinated an intervention that briefly pushed the dollar-yen rate close to 155 from nearly 164 at the end of the previous month. The yen’s recent movement toward the critical 160 level has sparked renewed debate over whether the two nations might intervene again.
Market focus is also on upcoming announcements from the Bank of Japan and the US Federal Reserve, with particular attention to whether Japan will utilize the Fed’s Foreign and International Monetary Authorities Repo Facility. This program permits foreign central banks to temporarily exchange their US Treasury holdings for cash to access US dollars.
The policy decisions of the BOJ and the Fed could support a stronger yen. At the same time, the possibility of another joint intervention might encourage investors to unwind their speculative short positions against the yen, according to Tomo Kinoshita, a global market strategist specializing in Japan at Invesco.
US Intervention Power Has Its Limits
“Whatever it takes to support Japan in a way that benefits the US economy and taxpayers,” US Treasury Secretary Scott Bessent stated two days after confirming that the Treasury had joined Japanese financial authorities in intervening to stabilize the yen.
Market analysts have noted that one of the main reasons behind US support for intervention is likely to stabilize the US Treasury market as the dollar-yen rate neared 164 at the end of July.
Kinoshita emphasized that Japanese authorities are concerned that further yen depreciation could boost inflation, while US policymakers worry that a strong US dollar might erode US export competitiveness. They also monitor volatility in Japanese markets, such as rising yields on long-term government bonds, which could spill over into US long-term Treasury yields. These concerns have prompted stronger coordination between the US and Japan to curb yen depreciation, he added.
However, just days after the joint effort, the yen again approached the 160 level. Market participants believe that Bessent’s capacity for currency intervention is limited, given the size of the Exchange Stabilization Fund, which has less than $220 billion available for such efforts.
Marco Casiraghi, a senior economist at Evercore ISI, recently noted that if the yen continues trading above 160 without US intervention, the market might interpret this as a sign that the US is reluctant to sell dollars. This could add pressure on the currency and challenge both sides’ willingness to support a stronger yen.
Focus on BOJ and Fed Policy Moves
Kinoshita explained that the BOJ adopted a more hawkish stance during its recent monetary policy meeting at the end of July, indicating that core inflation might surpass the 2% target. BOJ Governor Kazuo Ueda also suggested that the pace of interest rate hikes could accelerate, which might further boost the effects of recent foreign exchange interventions.
A substantial number of speculative short positions on the yen had accumulated in financial markets ahead of the intervention. If fears grow that another joint US-Japan effort is imminent, these positions might be forced to cover, pushing the yen even higher, Kinoshita said.
UBS Global Wealth Management’s Chief Investment Office commented in a recent report that the US Federal Reserve’s policy direction will be crucial in determining the yen’s exchange rate.
UBS suggested that, unless the BOJ undertakes a significant policy shift—such as accelerating interest rate hikes or raising its terminal rate above current expectations—the yen’s recovery is unlikely to be sustainable.