(Bloomberg) — About one month after Japan and the US joined forces to prop up the yen, strategists say the intervention succeeded in slowing the currency’s short-term slide but did little to alter the forces driving its longer-term decline.
After the coordinated intervention, the yen climbed from a four-decade low of around 164 per dollar to 155.23. But that boost proved unsustainable, with the currency already approaching 160 against the dollar again.
The wide interest-rate gap between Japan and other major economies has remained a key drag on the yen, encouraging investors to borrow cheaply in the currency and invest in higher-yielding assets overseas. Concerns over Japan’s fiscal outlook and elevated oil prices stemming from the conflict in the Middle East have added to the pressure.
“The intervention tackled positioning. It did not tackle oil prices, Treasury yields or the US-Japan rate differential,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management. “The next leg of sustained yen strength will require more help from Bank of Japan normalization and changes in hedging flows behavior.”
Overnight index swaps show around an 80% chance of a rate hike by the BOJ at its September meeting, with a move fully priced by October. BOJ Deputy Governor Ryozo Himino kept the door open to an interest rate increase next month in a speech on Thursday.
“Because markets have already largely priced in a September rate hike, a significant rally in the yen would require more than a single policy adjustment,” said Masayuki Nakajima, a senior strategist at Mizuho Bank. “Investors would need to become convinced that the subsequent path of policy normalization will be steeper than currently assumed.”
Market participants say the yen may have tumbled toward 170 per dollar had authorities not stepped in, as speculative bets against the currency continued to pile up. While the intervention helped slow the yen’s slide against the dollar, even more of its gains have faded in other crosses, including against the euro and Australian dollar.
What Bloomberg strategists say:
Japan’s currency looks to be stabilizing just stronger than 160/dollar, but the potential is there for the yen to resume its long-term weakening trend. Neither intervention nor BOJ interest-rate increases have been able to sustainably turn the exchange-rate around over the past 5 years or so.
— Garfield Reynolds, MLIV Team Leader. Read more on MLIV.
Investors will be watching Federal Reserve Chairman Kevin Warsh’s speech at Jackson Hole on Friday for any hints on the central bank’s policy and dollar-yen’s path from here. Several Fed officials favored an interest-rate hike last month and many indicated that policy tightening would be necessary if inflation didn’t decline, a record of the central bank’s most recent policy debate showed.
“The joint intervention was effective in the sense that it brought dollar-yen lower, but there are doubts over how lasting its effect will be in curbing yen selling,” said Kumiko Ishikawa, a senior analyst at Sony Financial Group. “As long as the Fed’s next move is expected to be a rate hike, the dollar will remain attractive to investors even if the US-Japan interest-rate differential narrows somewhat.”
US and Japanese officials have warned investors they’re determined to keep defending the yen if needed. Japanese Finance Minister Satsuki Katayama has flagged that Japan would utilize a US Federal Reserve facility that would allow it to use Treasuries as collateral to borrow dollars that could then be used to buy yen. US Treasury Secretary Scott Bessent has also urged the Fed to expand the program to help Tokyo.
“The market is clearly not convinced that Japan’s fundamentals justify an exchange rate below current levels,” said Jane Foley, the head of FX strategy at Rabobank. “The MOF will likely be hoping that it does not have to intervene again. That said, intervention could be timed to coincide with a September BOJ rate hike – the market will be nervous of that.”
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