Washington and Tokyo Coordinate to Boost Yen Off Record Low

Washington Extends a Hand

America's participation in Japan's campaign to defend its embattled currency gave the yen an abrupt lift in recent trading. Currency analysts doubt the move marks the start of a lasting turnaround, as the yen's fundamentals remain fragile. "Japan's policy mix remains unlikely to generate sustained yen strength," said Teck Leng Tan and Dominic Schnider, strategists at UBS, on Monday. They added: "With the BoJ expected to continue gradual policy normalization and real rates remaining negative, the yen should continue to be supported more by intervention risk than by domestic monetary fundamentals."

HSBC also cautioned that a sustained yen rebound would need a more fundamental policy shift in Japan.

What It Means for Markets

Earlier interventions in 2022 and 2024 were carried out by Japan alone, with the Bank of Japan selling dollars to buy yen. This time, Tokyo is believed to have followed a similar playbook, but the U.S. Treasury may have used euros rather than dollars to purchase yen. In any case, the dollar's reaction Monday was underwhelming.

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"The dollar's resilience probably owes to the unresolved issue of whether the Federal Reserve will hike in September," said Chris Turner, ING's head of markets. If the Fed raises rates, U.S. Treasurys would offer a larger yield cushion, keeping international demand for the dollar firm and possibly pulling the yen lower again.

For investors, the bigger question is whether the BoJ follows the intervention with faster tightening. A more hawkish Bank of Japan would give the yen a fundamental reason to strengthen, rather than relying on official buying to hold the line. Without that, any yen rally could fade as quickly as it began.

A History of Intervention

These intervention episodes fit a broader pattern. The yen's slide to a 40-year low reflects persistent interest-rate gaps. Those episodes are a reminder that a currency in decline often needs more than occasional official buying to reverse course.

The latest operation is notable for including U.S. participation, even if the details of its funding remain unclear. Even with U.S. involvement, the yen may remain dependent on intervention risk unless Tokyo pairs official buying with a more convincing domestic policy response.

A Possible Backlash?

On Substack, Robin Brooks, who holds a senior economics post at the Brookings Institution, argued that the joint move could undermine, not improve, trust in the yen. If U.S. officials bought yen with euros rather than dollars, investors might conclude Washington wanted to keep Japan from selling Treasurys to finance the operation, he said. That would be unusual, since past coordinated interventions have generally been funded with dollar assets.

"This kind of twist in my opinion undercuts the efficacy of U.S. participation, because it invariably will have markets wondering why the US didn't just fund Yen buying out of Dollars," Brooks said.

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