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The yen has given up roughly half its gains following the historic joint intervention by the US and Japan, with investors saying the lack of a “unified voice” among central banks lessened its market impact.
The currency bounced from a four-decade low around ¥164 to the dollar in late July to almost ¥155 following interventions by Tokyo and Washington, but has since fallen back. The dollar weakened by as much as 1 per cent to trade at ¥159.36 on Monday before strengthening slightly to ¥159.08 on Tuesday.
Traders in futures and options markets continue to hold bearish bets on the Japanese currency, although they have reined in the size of their positions since the intervention, according to the latest data from the US Commodity Futures Trading Commission.
“The effect of the intervention is fading,” said Van Luu, global head of solutions strategy at Russell Investments, adding it was “going to take more” to create a sustained upswing in the yen.
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Investors said that the intervention would be unlikely to provide lasting support unless it was accompanied by interest rate rises from the Bank of Japan. It was also weaker, they argued, for the lack of international co-operation: the FT reported last week that the European Central Bank had not been consulted by the US ahead of its unusual move to sell euros to prop up the Japanese currency.
“I don’t think it’s helpful that the ECB was not involved,” said Guy Miller, chief market strategist at insurer Zurich, arguing that co-ordination between central banks “signals to the market that there is a unified voice”. The move contrasted with a co-ordinated G7 intervention to weaken the yen after Japan’s 2011 earthquake.
Investors are now focused on whether the BoJ bows to pressure from the market and increases interest rates to support the currency, which has been battered by concerns over government spending and inflationary pressures including higher oil prices. Previous interventions by the Japanese Ministry of Finance in April and May provided only shortlived relief to the yen.
The central bank’s summary of opinions from its July meeting, at which it held rates at 1 per cent, showed that “the balance of risks is clearly skewed” to an earlier rate rise, said Goldman Sachs analysts in Tokyo.
“Given that underlying CPI inflation has been approaching 2 per cent and greater consideration should be given to upside risks to prices than before, it could be considered that the pace of policy interest rate hikes will be faster than market expectations,” said one board member in the report from the BoJ released on Monday.
Traders are putting a roughly 50 per cent probability on the BoJ increasing its benchmark interest rate by a quarter point at its next meeting in September.
Analysts at Citi are predicting “a regime shift in BoJ policy, meaning a more aggressive pace of hikes starting with September” and reaching 2 per cent by the end of next year.
A renewed slide in the yen back through ¥160 — a level that has prompted currency interventions in the past — would feed inflationary pressures further as well as intensifying anxiety among US policymakers about excessive dollar strength and whether Japan will need to sell a portion of its vast holdings of US Treasuries as part of a bigger FX intervention.
Some investors argue that market conditions, including negative short-term positioning against the yen and the currency’s low valuation on traditional metrics such as purchasing power, were similar to those in August 2024, when a sudden appreciation in the currency sparked volatility across financial markets.
Investors borrow yen at low rates to fund widespread bets elsewhere, in a so-called carry trade, and reversing those trades can shake foreign asset markets.
“Conditions are somewhat similar to 2024,” said Luu, pointing to “very short yen” positioning. A repeat was possible if economic data or central bank action forced investors to quickly accommodate both a “more dovish Fed [and] more hawkish BoJ”, he added.
But other analysts believe that even if the pace of BoJ rate rises increases, the likelihood of a rapid unwind of the carry trade remains small, given the big gap between Japan’s interest rate and those in other big economies.
“Even if the short-term rate differential narrows somewhat, it should remain sufficiently wide for the time being,” said Ayako Fujita, chief Japan economist at JPMorgan. “Carry trades may shrink” as longer-term Japanese yields converge with those elsewhere but that is a “story for further down the road”, Fujita added.
