Japan's Finance Ministry confirms it intervened to lift yen nearly 5%
President Donald Trump on Sconfirmed the U.S. had intervened to buttress the yen as "a signal of friendship."
Japan's Ministry of Finance confirmed Monday that, in conjunction with the U.S. Treasury Department, it staged a joint intervention in forex markets last week to strengthen the yen/dollar exchange rate.
As a consequence the Japanese currency strengthened almost 5% from last week's forty-year low of -Yen164 to -Yen156.70 on Monday
The reaction of currency markets seems somewhat underwhelming, however. Even after this sharp rally, the yen (USDJPY) is only back to its May trading level, it's still roughly flat on the year against the dollar DXY and compared with the 12% spike, from 161 to 141 engineered by the Bank of Japan on the corresponding weekend in 2024, the move is far more modest.
The maneuver, however, did have the effect of lowering the broader dollar index DXY below 100 for the first time since June.
Until last week's combined intervention, both Treasury Secretary Scott Bessent and Japan's Finance Minister, Satsuki Katayama, had tried to boost the yen merely through verbal encouragement, but that strategy proved unsuccessful.
Estimates of the scale of last week's intervention top $50 billion. During a U.S. cabinet meeting on Friday, Reuters snapped a 'To Do" list on Bessent's desk notepad that contained a solitary entry: "Buy Japanese yen $5-10 bill."
The Financial Times reported Friday that the Federal Reserve Bank of New York had conducted its intervention by selling euros (EURUSD) to buy the yen, citing sources familiar with the matter. The problem with intervention from the U.S. perspective is that usually Japanese moves to bolster its currency involve selling down some of their enormous $1.1. trillion holdings of U.S. Treasury bonds, and with long bond yields BX:TMUBMUSD30Y at a near two-decade high, this is not helpful.
Intervention, according to some commentators can only go so far, though. "The yen isn't falling because evil speculators are ganging up on Japan. It's falling because government bond yields are way below where they should be," Robin Brooks, senior fellow at the Brookings Institution posted on X Monday.
Interest rate differentials are usually the driver of forex rates because capital is attracted by higher returns. Japan's policy rate is just 1%, while the Fed Funds target rate (FF00) is 3.50-3.75%.
More constructive than intervention, some forex strategists argue, would be for the Bank of Japan to increase interest rates, and last Friday it opted to leave them unchanged. ING's economist Chris Turner told clients last week that "firm discussions could potentially see chances of a 25 basis-point hike at the next meeting September 18." Fundamentally, though, Turner highlights the problem: the consumer-price index in Japan is approaching 2% and the policy rate is only half of that.
Gavekal's chief executive officer, Louis Gave, wrote a note to clients Monday which tended to dovetail with Turner's opinion. He argued that "the yen cannot rise meaningfully unless either the Fed cuts rates, or the Bank of Japan starts to hike," and that like every North Asian currency, the yen is "seriously undervalued." This was also the conclusion of the Mapping the World report by Deutsche Bank in July and one of the findings of the Economist's latest installment of the Big Mac Index.
Japan runs the largest current account surplus in the G-7. In theory, this should support its currency.
Japan runs the biggest current account surplus in the whole G-7 which should, in theory, be supportive of the currency. The dynamics of the Japanese yen carry-trade, however, a trading strategy where investors short low-yielding yen assets to buy higher-yielding assets elsewhere, have kept it under the cosh for most of the past 15 years.
-Jules Rimmer