The More Intervention, The Louder Short Sellers Laugh! Goldman: Japan's Largest FX Intervention in 15 Years Triggers Massive Unwinding of Yen Carry Trades

Goldman Sachs stated in a research report released Friday (14th) that Japan's largest foreign exchange intervention in 15 years has not reversed the yen's downward trend, but rather provided the market with a 'tactical opportunity to sell the yen at higher prices.'

At the end of last month, the United States and Japan unusually coordinated to buy yen, temporarily pulling USD/JPY back from near 163 to around 155. However, within less than two weeks, the pair slid back toward the 160 level. In early Asian trading today, USD/JPY was quoted at 159.46.

According to Karen Reichgott Fishman, strategist at Goldman Sachs, the scale of tactical unwinding of yen carry trades triggered by this intervention has already surpassed the initial unwinding seen after the July 2024 intervention. She added that if macroeconomic conditions shift to support the yen, positions could even flip into net longs, echoing the summer 2024 scenario. However, current U.S.-Japan interest rate differentials remain wide, with Japan's interest rate at approximately 1%, far below most developed economies. The profitability of borrowing low-yielding yen to purchase high-yield assets remains highly attractive.

Data from JPMorgan and State Street show that as of August 4, hedge funds have cut half of their bearish bets on the yen. Yet, some capital is flowing back into carry trade pools.

Ashwin Binwani, founder of Alpha Binwani Capital, said, 'The intervention gave us an excellent opportunity to sell yen at better prices. Carry trades are too profitable to miss.'

Bart Wakabayashi, manager of State Street’s Tokyo branch, also noted that real-money accounts continue to hold carry positions, with the yen being persistently sold against the Australian dollar, euro, U.S. dollar, Canadian dollar, and British pound. This year, short positions pairing the yen against the Colombian peso, Turkish lira, and Norwegian krone have all delivered returns exceeding 10%.

The current risk lies in the growing accumulation of short-covering activity, which simultaneously increases the likelihood of further official intervention. Over the past week, the yen has already given back about half of its post-intervention gains. As fiscal pressures and interest rate differentials remain unresolved, the 160 level continues to serve as a sensitive red line between markets and Tokyo authorities.