Key Takeaways:
Japan's record $98.7 billion joint intervention with the U.S. lifted the yen off a 40-year low but failed to reverse its slide, leaving the Bank of Japan's September rate decision as the decisive test.
Japan spent $98.7 billion propping up the yen in the past month in a joint action with the U.S., a record intervention that has had a modest impact so far. The currency has given up many of its initial gains, highlighting the limits of government efforts to move prices in financial markets, and the U.S. has also tried to stem a rise in bond yields, again with limited success.
"The joint U.S. intervention is at best a short-term corrective," said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics. "Exchange rate trends depend primarily on monetary and fiscal policies."
Data released by the Japanese government Friday confirmed the historic scale of the operation that began in late July with the backing of Treasury Secretary Scott Bessent. Combined with an earlier defense of the currency in April and May, Japan's total intervention spending this year has reached around $170 billion, reflecting Tokyo's anxiety after the yen fell to a 40-year low. The currency was trading Friday between 159 and 160 to the dollar, compared with nearly 164 shortly before the intervention — a level not seen since 1986. The yen is down around 8 percent against the dollar over the past year.
The intervention was the first time since 1998 that the U.S. and Japan acted jointly to strengthen the Japanese currency. A notepad in front of Bessent at a cabinet meeting on July 31 listed buying $5 billion to $10 billion of yen on his to-do list, although he has not stated the exact amount the U.S. spent. Bessent said yen weakness risked setting off a cascade of currency devaluations that could trouble the U.S., and shortly after took unusual steps in the U.S. bond market to tamp down yields on long-term Treasuries.
Rate Differentials Widen Again
The yen's slide past 160 per dollar this week — the first breach since the intervention — shows how little the record spending has done to offset the pull of a more hawkish Federal Reserve. Fed Chairman Kevin Warsh signaled openness to raising rates at the Jackson Hole symposium, telling attendees the Fed must be confident underlying inflation is moving toward its objective "clearly and at sufficient speed, or there remains work to do." The remarks lifted Treasury yields and the dollar, pulling Japanese government bond yields higher in turn; the 10-year JGB yield rose to a fresh 30-year high of 2.95 percent.
Yen weakness will be difficult to correct because a major factor driving its decline is sales of yen by foreign investors to cover currency risk when they invest in the booming Japanese stock market, analysts at Citi said in a note to clients Friday. Higher Japanese long-term yields also raise the risk of spillover into global bond markets given Japan's role as a major holder of foreign assets.
Most market watchers expect the Bank of Japan to raise its benchmark interest rate at its next meeting set for Sept. 17-18, a move that would further narrow the interest-rate gap between the U.S. and Japan that many economists cite as the main reason for the yen's weakness, since investors can earn more holding dollars. Deputy Governor Ryozo Himino struck a hawkish tone at a news conference Thursday, citing the "risk of falling behind the curve if we fail to act in a timely manner."
Treasury Secretary Bessent told Reuters the yen's moves remain "pretty well contained" and said he expects BOJ Governor Kazuo Ueda to do the right thing on monetary policy with the backing of Prime Minister Sanae Takaichi. Nomura Research Institute's Takahide Kiuchi, a former BOJ policy board member, said Bessent may use the upcoming Group of 20 finance ministers' gathering to press Japan to maintain fiscal discipline and pursue further BOJ rate increases in exchange for continued coordinated intervention support. Curbing yen weakness would help correct broader dollar strength and reduce the U.S. trade deficit, while rising Japanese long-term yields tied to yen depreciation risk spilling over into U.S. markets, making yen containment a shared interest for both countries.
If the BOJ delivers a hike on Sept. 18, the narrowing rate gap could give the yen durable support and validate the intervention's intent. If it holds, the currency may test new lows, forcing Tokyo to weigh the cost of further record-scale intervention against the diplomatic bargain with Washington. Japan's finance minister, Satsuki Katayama, said Friday the government would enhance the yen's credibility by boosting the country's long-term competitiveness and potential economic growth, calling the allies' coordination "extremely strong."
This article is for informational purposes only and does not constitute investment advice.
