The Japanese yen, long treated like a punching bag in the global foreign exchange market, is being reassessed after a joint U.S.-Japan currency intervention. With the United States standing behind Japan, global financial institutions that had been betting on a weaker yen are revising their exchange-rate forecasts one after another or warning that the risk of transactions selling yen to buy dollars has grown compared with before.
On the 5th (local time), Bank of America (BofA) lowered its year-end forecast for the yen against the U.S. dollar to 149 from 152 (a yen appreciation). When the yen exchange rate against the dollar falls, fewer yen are needed to buy the same $1. That means the yen strengthens. If the current rate around 158 moves down to 149 by year-end as BofA projects, the yen would be about 6% stronger than now. Nomura Securities of Japan presented an even lower year-end forecast of 147.5.
The yen slid to 163.99 per dollar last month, its weakest level in about 40 years. But after the United States and Japan jointly bought yen on the 3rd, it strengthened to as high as 155.20. As of the morning of the 6th, it partially gave back gains to the 157–158 range, but it did not retreat to the pre-transfer level. This differs from past episodes when Japan intervened alone and surrendered all gains within days.
Until the transfer, speculators actively bought and sold yen, taking Japan's treasury constraints into account. When Japan intervened on its own, the size of its foreign exchange reserves—namely, the dollars available for currency intervention—imposed a clear ceiling. Speculators would tally how many dollars Japan had left and, when they judged the ammunition was spent, sell yen again. As these transactions repeated, the effect of Japan's interventions in the foreign exchange market did not last long.
However, in a report on the 5th, BofA said, "While solo intervention to defend one's own currency can be perceived as capped by the size of foreign reserves, the ultimate constraint that limited intervention has been effectively removed with U.S. participation." U.S. Treasury Secretary Scott Bessent said in a CNBC interview on the 4th that the United States would do "whatever it takes" to support Japan in a way that benefits the U.S. economy and the taxpayer. He used the same phrase that former European Central Bank (ECB) President Mario Draghi employed during the 2012 eurozone crisis when he said he would "defend the euro." BofA took this as evidence that a shared goal of stabilizing the yen over the long term underpins the two countries' exchange-rate cooperation.
The yen has long been treated as the easiest currency to target in global financial markets. Japan's interest rates have been the lowest among major economies for decades. Borrowing yen cheaply and shorting it, then investing the proceeds in higher-yielding U.S. assets, allows investors to pocket both the interest-rate spread and foreign-exchange gains from yen depreciation. The market calls these transactions the "yen carry trade." But with the United States backing Japan, anxiety has grown that the two governments could step in at any point during the yen carry trade. French financial institution BNP Paribas said that "since the U.S. intervention, the risk-adjusted expected revenue from long dollar/yen transactions has deteriorated sharply."
Japan's largest financial group, Mitsubishi UFJ (MUFG), offered a similar assessment. Derek Halpenny, head of EMEA Global Markets Research at MUFG, told Reuters on the 5th that "U.S. participation is a significant shift that far more strongly curbs the appetite to go long dollar/yen than at any time when Japan intervened alone."
Since the latest exchange-rate intervention, the United States is even shaking the Bank of Japan's authority over the policy rate, which should be independent. U.S. Treasury Secretary Scott Bessent said in a CNBC interview on the 4th that "policy and fundamentals should follow" after intervention. Markets took the comment as pressure on the Bank of Japan to raise its policy rate at the September meeting. If the U.S.-Japan rate gap narrows faster than expected, the incentive to borrow and short yen diminishes accordingly.
According to a Reuters survey of about 60 foreign-exchange strategists conducted from the 31st of last month to the 5th of this month, roughly 95% of respondents said that "it is difficult to keep the yen from weakening with only temporary intervention." Of those, nearly all said that "the Bank of Japan must raise rates to reverse the yen's weakness."
Ales Kutni, head of international rates at U.S. asset manager Vanguard, said, "Intervention can slow the pace of a currency's decline and provide short-term support, but history shows the effect fades relatively quickly unless fundamentals change," adding, "We have already seen multiple cases where flows created by large-scale intervention lasted not months but days or weeks." BofA also argued in its report that "to preserve the impact of intervention, the Bank of Japan should raise rates in September rather than wait until October."
In June, the Bank of Japan raised its policy rate to 1% per year, the highest in 31 years. Until the transfer, the Bank of Japan had raised the policy rate roughly once every half year. If the Bank of Japan raises the policy rate again in September, the hike would come in just three months—much faster than before (six months).
Ayako Fujita, chief Japan economist at JP Morgan Securities, told Reuters on the 5th, "While the Bank of Japan has left the door open to a September hike, it will likely want to wait until October to further assess the effects of past hikes on the economy," adding, "If it hikes in September, an additional increase could be discussed at the December meeting."