[Edaily Reporter Bang Sung Hoon ] The value of the yen, which had been boosted by the first-ever joint market intervention by the U.S. and Japan, has given back half of its gains in just ten days. Although both countries have warned that they are prepared to intervene again at any time if necessary, the market is once again selling off the yen, citing the unresolved fundamental issue of the U.S.-Japan interest rate differential.
According to Bloomberg on the 11th, the dollar-yen exchange rate closed at 159.29 yen on the Tokyo foreign exchange market the previous day, up 1% from the previous trading day (meaning the yen weakened). This is the weakest performance among the Group of Ten (G10) currencies. The yen had plummeted to its lowest level in over 40 years, falling to around 164 yen per dollar at the end of last month, before surging to 155 yen per dollar early this month immediately following joint U.S.-Japan intervention.
However, it subsequently turned weak again, giving back about half of its gains. While the joint U.S.-Japan intervention to buy yen—the first since 1998—drew significant attention, it appears to have had little effect.
According to a Bloomberg analysis, Japanese authorities are estimated to have injected approximately $34 billion (48.1406 trillion won) on the 31st of last month. It is also estimated that they poured in $53 billion (75.0427 trillion won) the day before, on the 30th of last month; if confirmed, this would mark the largest single-day intervention in history.
Nevertheless, the yen’s weakness has resurfaced because the wide interest rate gap with the U.S., concerns over Japan’s deteriorating fiscal health, and geopolitical uncertainties remain. Strategists at Goldman Sachs, including Kamakshya Tribedi, noted in a report, “The relatively muted reaction to the intervention reflects the fundamental reasons behind the yen’s weakness,” adding, “Unless there are major changes in global conditions or policy, depreciation pressure will resurface over time.”
The lack of coordination among major central banks is also cited as a weakness. The Financial Times (FT) reported last week that the U.S. took the unusual step of selling euros to prop up the yen without prior consultation with the European Central Bank (ECB).
Guy Miller, chief market strategist at Zurich Insurance, noted, “The ECB’s absence does not help,” pointing out that coordination among central banks “sends a signal to the market that there is a single voice.”
Market attention has shifted to whether the Bank of Japan (BOJ) will raise interest rates. Although the BOJ kept its benchmark interest rate at 1% per annum at its meeting late last month, a summary of meeting comments released the previous day revealed that one policy board member stated, “Since the underlying inflation rate is approaching 2% and the risk of rising prices must be considered more than before, the pace of policy rate hikes could be faster than the market expects.”
Traders estimate the probability of a 0.25 percentage point hike at the BOJ’s meeting next month at about 63%. Citigroup anticipates a “shift in the BOJ’s policy stance” and forecasts that the pace of hikes will accelerate starting next month, reaching 2% by the end of next year.
Some investors are wary, noting that the current situation resembles that of August 2024. At that time, the yen surged suddenly, triggering massive unwinding of “yen carry trades”—where investors borrow cheap yen to invest in assets in other countries—and causing significant turbulence in global financial markets.
Van Ru, Global Head of Investment Strategy at Russell Investment Solutions, noted that “conditions are somewhat similar to 2024” and pointed out that short positions in the yen have built up excessively.
In contrast, Ayako Fujita, Chief Japan Economist at JPMorgan, drew a clear line, stating, “Even if the short-term interest rate differential narrows somewhat, it will remain sufficiently wide for the time being,” and added that a reduction in carry trades is “a long way off.”
