Japan-US Joint Effort to Rescue Yen Falters? Intervention's One-Month Rally Reverses as USD/JPY Nears 160 Again – Experts: Hard to Overcome Massive Interest Rate Differentials

About a month after Japan and the United States jointly intervened to support the yen, the currency rebounded from around 164 per dollar—a 40-year low—to 155.23 yen, but the rally did not last, and it is now approaching 160 yen again. Strategists say this intervention succeeded only in slowing the yen’s short-term decline, doing little to change the fundamental factors that continue to weaken the yen over the long term.

The massive interest rate differential between Japan and other major economies remains the key factor dragging down the yen, encouraging investors to borrow yen at low cost and invest the funds in higher-yielding overseas assets. Additionally, Japan’s deteriorating fiscal outlook and rising oil prices driven by Middle East conflicts are further weighing on the yen.

Masahiko Loo, Senior Fixed Income Strategist at State Street Global Advisors, said, "Intervention deals with market positioning, but it doesn’t address oil prices, U.S. Treasury yields, or the U.S.-Japan interest rate differential."

He noted that sustained yen appreciation will require further support from the Bank of Japan’s (BOJ) monetary normalization, along with a shift in investor risk-off behavior.

Overnight index swap (OIS) contracts indicate that markets currently price in about an 82% chance of a BOJ rate hike in September, with a rate hike by October almost fully reflected in prices.

On Thursday (27th), BOJ Deputy Governor Masazumi Wakatabe delivered a speech without ruling out a rate hike next month.

Masayuki Nakajima, Senior Strategist at Mizuho Bank, said, "Since the market has largely priced in a September rate hike, a single policy adjustment is unlikely to drive a significant yen rally."

He added that for the yen to see stronger appreciation, investors must believe that the BOJ’s pace of monetary normalization will be steeper than currently expected.

Japanese and U.S. Officials: We Will Defend the Yen When Necessary

Japanese and U.S. officials have warned investors that authorities will continue to defend the yen if needed. Japan’s Finance Minister, Shunichi Suzuki, said Japan could use a mechanism provided by the U.S. Federal Reserve (Fed) to borrow dollars by pledging U.S. Treasuries as collateral, then use those dollars to buy yen.

U.S. Treasury Secretary Scott Bessent also urged the Fed to expand this program to assist Japan. According to economists and market participants, Bessent’s main motivation for supporting the yen is likely to prevent the shock of a sharply weakening yen from spilling over into the U.S. Treasury market.

Market participants say that without official intervention, the yen might have already fallen toward 170, as market positioning had been increasingly skewed toward shorting the yen.

While the intervention did slow the dollar-yen decline, the yen’s gains against other major currency pairs have faded even more, including against the euro and the Australian dollar.

Jane Foley, Head of FX Strategy at Rabobank, said, "The market clearly doesn’t believe Japan’s fundamentals are strong enough to support the yen at current levels or lower."

She noted that the Ministry of Finance may hope to avoid intervening again. However, if the BOJ raises rates in September, the intervention could coincide with the rate hike, putting markets on high alert.

Warsh’s Friday Speech as the Next Big Yen Variable

Investors will closely watch Fed Chair Kevin Warsh’s speech at the Jackson Hole global central bank symposium on Friday for clues on U.S. monetary policy and the future direction of the dollar-yen pair.

Minutes from the Fed’s last meeting showed that several officials supported a rate hike, and many indicated that further tightening would be necessary if inflation fails to decline.

Meanwhile, the dollar has slightly recovered this week from a nearly 1% drop the previous week. That drop occurred after the U.S. Treasury announced an increase in Treasury buybacks, triggering a sharp sell-off in U.S. bonds and prompting investors to adopt a so-called "currency depreciation trade," which put pressure on the dollar.

Thierry Wizman, Global FX and Interest Rate Strategist at Macquarie, said, "The possibility of Warsh delivering a structurally hawkish speech at Jackson Hole is higher than a dovish one. A dovish speech would contradict the median shift in FOMC voters’ stance, ignore hawkish signals from other central banks, and overlook stubbornly high U.S. inflation data."

Regarding the yen, Kumiko Ishikawa, Senior Analyst at Sony Financial Group, said the joint Japan-U.S. intervention did effectively push dollar-yen lower. However, the market still doubts whether this measure can sustainably curb yen selling pressure. As long as the market continues to expect the Fed’s next move to be a rate hike, even a slight narrowing of the interest rate differential will leave the dollar attractive to investors.