- Japan's finance ministry has pledged it will not hesitate to strike again after the July 30-31 coordinated yen-buying operation with the U.S. Treasury, which pulled the currency back from a 40-year low of 163.99 per dollar.
- The yen surged to as strong as 155.20 in the ensuing days but has since weakened back above the 159 level.
- According to Goldman Sachs, Japan has enough reserves for more interventions, with access to a Federal Reserve facility making the full $1 trillion available in liquid form.
- Market bets on Bank of Japan (BOJ) rate hikes have increased, with a 76% chance of a hike in September, compared to 24% on July 30.
- Analysts warn that the BOJ must hike to sustain yen gains; otherwise, the yen faces renewed downward pressure.
- Goldman Sachs estimates that of Japan's roughly $1 trillion in U.S. dollar reserves, about $200 billion likely sits in cash or cash equivalents.
- The intervention is not seen as a sustainable fix, as noted by Goldman Sachs, which stated it ultimately just buys some time.
- The carry differential between Japanese and U.S. borrowing rates remains a key driver of the exchange rate, according to analysts.
- Concerns about Japan's unfunded tax cuts and other economic factors continue to put upward pressure on government bonds, affecting the lasting impact of interventions.
Goldman Sachs indicates Japan's substantial reserves, approximately $1 trillion, allow for significant yen interventions, with $200 billion in cash equivalents readily available.367
According to strategist Karen Fishman, Japan could execute a few more interventions similar to last month's historic operation, which saw $85 billion deployed in just two days, marking the largest intervention since 2011.
However, the sustainability of these interventions is questioned, as past actions have led to the yen returning to 40-year lows shortly after.
Market dynamics are shifting, with a 76% chance of a rate hike in September, compared to 24% on July 30, as traders anticipate a more hawkish stance from the Bank of Japan (BOJ).4
Praneet Shah, head of FX options trading at Goldman, noted that the yen's future performance hinges on the carry differential between Japanese and U.S. borrowing rates.8
U.S. Treasury Secretary Scott Bessent has urged Japan to align its policies with fundamentals, suggesting a need for the BOJ to raise rates to support the yen.
The coordinated intervention with the U.S. Treasury has temporarily bolstered the yen, but analysts warn that without decisive action from the BOJ, the currency may weaken again.
Takahide Kiuchi from Nomura Research Institute suggests that political pressure may lead to accelerated rate hikes, impacting the yen's stability moving forward.
“Goldman estimates Tokyo deployed up to $85 billion in the first two days of last month's operation, the largest two-day foray since October 2011. Markets now price a 76% chance of a September BOJ hike, up from 24% on July 30, with analysts warning that a delay would be seen as 'a betrayal of the market.'”
CNBC
