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Xinyi Wu

Zhang Shidong

With a rare joint US-Japan market intervention weeks ago failing to rectify the weakness of the Japanese currency, Tokyo and Washington could be forced to launch another round of boosting efforts, with a deepening US Treasury rout expected to fuel the global yen carry trade, according to analysts.
The yen has been on a sustained decline, falling to a 40-year low to trade above 163 per US dollar in late July. Though the US-Japan intervention briefly halted its slide, the currency has already reversed half those gains and is once again approaching the 160 per US dollar threshold.
Meanwhile, US Treasury yields have risen to multi-year highs, pushing up US borrowing costs and making a persistent US-Japan interest rate gap more likely.
“Intervention can alter positioning and disrupt momentum, but it has not changed the fundamental interest-rate differential that continues to favour the dollar,” said Gary Dugan, CEO of The Global CIO Office, which advises family offices and high-net-worth investors.
“That the yen has drifted [lower] despite a more hawkish Bank of Japan and direct intervention suggests investors still see US yields as the dominant variable.”
The 30-year US Treasury yield closed at 5.285 per cent on Tuesday, retreating slightly from a fresh 19-year-high earlier in the day. Meanwhile, the rate for 30-year Japanese government bonds closed at 4.141 per cent.
As the fundamental interest rate differential … has not changed, carry trades are likely to increase overall
Shao Yu, Fudan University
In terms of 10-year bonds, the US Treasury yield closed at 4.706 per cent, compared with 2.938 per cent for Japanese government bonds.
The wide interest rate differential between Japan and the United States has helped drive a persistent yen carry trade – a strategy in which investors borrow yen cheaply to finance higher-yielding assets overseas, often in the US – which has reinforced the depreciation of the yen.
“As the fundamental interest rate differential … has not changed, carry trades are likely to increase overall,” said Shao Yu, chief economist with the Sci-tech Innovation Centre at Fudan University’s School of Management.
As such, the rare joint US-Japan market intervention served primarily as a “political gesture”, Shao added.
The US joined Japan’s efforts to intervene in the foreign exchange market to strengthen the yen at the end of last month, in a rare move seen as an attempt to avoid a massive sell-off of US Treasuries by Japan, the largest foreign holder of US government debt.
A stable yen is crucial to curbing volatility in American markets. Japan cut its US Treasury holdings by 2.3 per cent to US$1.116 trillion in June, according to the latest data available.
Pressure is now mounting on the Bank of Japan (BOJ) to raise interest rates to counter persistent inflation and the weak yen at its next meeting in September. Japan’s central bank last raised its policy rate to 1 per cent in June – the highest level since 1995.
For the yen to strengthen on a more sustained basis, we will need to see successful Japanese government policy to stimulate growth
Chris Turner, ING
Markets are pricing in a 78 per cent probability of a rate hike by the BOJ at its meeting next month, according to Chris Turner, global head of markets at ING. But while it would be a welcome move, it was unlikely to have a meaningful impact on the yen, he said.
“It’s a low-volatility environment, meaning that the carry trade is favoured,” Turner said, noting that the expected 0.25 percentage point rate increase would not change that.
“For the yen to strengthen on a more sustained basis, we will need to see successful Japanese government policy to stimulate growth and increase investment returns,” he added.
According to Shao, the yen could only strengthen if the BOJ raised rates substantially, but the Japanese economy is currently unlikely to be able to withstand that kind of increase. Otherwise, any sustained appreciation of the yen would require the US to cut rates, he said.
The US Federal Reserve has set rates at between 3.5 and 3.75 per cent in recent quarters, and is expected to keep the rates unchanged for the rest of the year.
Carlos Casanova, a senior economist at the Swiss private bank Union Bancaire Privee, similarly noted that the more probable path to easing pressure on the yen would be US Federal Reserve rate cuts, which are expected from the second quarter of next year.
An additional one to two BOJ rate hikes should be enough to buy time till then, Casanova said, noting that soft domestic growth data and ongoing uncertainties in the Middle East were likely to keep Japanese policymakers cautious.
Japan’s economy grew 1.1 per cent in the second quarter on an annualised basis amid sluggish domestic demand, official data showed on Monday. This was down from 2.1 per cent in the first quarter and missed expectations by nearly half.
“In the interim, another intervention is possible if 160 is breached decisively, but without BOJ follow-through, its impact would likely fade quickly,” Casanova said, referring to the yen’s exchange rate against the US dollar.
Similarly, Turner – who believes the BOJ’s policy rate needs to be much closer to 2 per cent for the yen to mount a significant recovery – said that Japan had enough money in its US$1 trillion reserves to do two or three more rounds of large-scale intervention.
Tokyo would likely launch an intervention if the yen reaches “the 163-164 area” against the US dollar, according to Turner. “And I assume the US would join them again,” he added.


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Another US-Japan intervention may be needed to prop up the Japanese currency, as a US Treasury rout fuels the yen carry trade, analysts say


Another US-Japan intervention may be needed to prop up the Japanese currency, as a US Treasury rout fuels the yen carry trade, analysts say.


Why the historic US-Japan intervention has failed to lift pressure on the yen

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Another US-Japan intervention may be needed to prop up the Japanese currency, as a US Treasury rout fuels the yen carry trade, analysts say

Another US-Japan intervention may be needed to prop up the Japanese currency, as a US Treasury rout fuels the yen carry trade, analysts say