The yen has once again become a major concern for global investors. The yen's slide erased much of the optimism generated by coordinated US-Japan intervention in early August, leaving investors wondering what could truly stabilize the currency.
Rick Rieder, who oversees global fixed income at BlackRock, says the answer has nothing to do with government intervention and everything to do with Japan's central bank.
When a currency keeps falling, governments often step in and buy their own money to push its value up. It is a classic move, and Japan has used it before. Rieder has watched this play out for decades.
"I've watched intervention happen over time - you need to really keep going with a lot of fire power," he said.
In other words, propping up a currency with one-time purchases is like bailing out a boat with a bucket that has a hole in it. You can keep scooping, but the water keeps coming back.
The yen's slide has revived familiar questions about whether the Japanese government will step into currency markets or let the BOJ do the heavy lifting. Rieder's comments suggest the latter is the only route that can last. The BOJ has already moved once this year, and investors are watching for signs that it will keep tightening.
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Here is the core issue. Japan's benchmark interest rate sits at 1%, while the US Federal Reserve's target range is 3.5% to 3.75%. That gap means investors can get much better returns on US assets, so they sell yen to buy dollars, pushing the yen down further.
Rieder predicts another increase in September. He admits the BOJ might delay that decision to December, but he thinks the direction is clear.
"You've got to get monetary policy to a place that people believe that you're going to raise the rate - you're going to be hawkish when you need to be," he said. "And I think out of Japan, we need to see that."
The government supports a near-term BOJ rate increase. That is a notable shift, since Japanese leaders have historically preferred a weak yen because it helps the country's big exporters.
The yen's prolonged slide is not a new phenomenon. For years, Japan's ultra-loose monetary policy kept rates near zero, contributing to persistent currency weakness. Now, with inflation beginning to tick up, the central bank faces a delicate balancing act: tightening enough to support the yen without choking off a fragile economic recovery. This tension explains why the BOJ has moved cautiously so far, and why any future hikes will be closely scrutinized by global markets.
For everyday investors, the tug-of-war in Japan's currency markets matters more than it might seem. A stronger yen would ripple through global markets, affecting everything from the value of US stocks to the price of your next trip to Tokyo.
Rieder believes that if the BOJ follows through with a hike and signals more to come, it would go a long way toward calming things down. "That'll be important for the markets to stabilize," he said.
But that assumes the Fed follows through and that the BOJ actually delivers on its own tightening.
For now, the path forward for Japan's currency is clear, even if it is not easy. It takes a central bank willing to make a tough call and stick with it. The question is whether Japan's leaders have the appetite for the fight.
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