The yen's rally following the joint US-Japan intervention has likely concluded, according to currency strategists. Market expectations of a Federal Reserve interest-rate hike this year are set to support the dollar, thus diminishing the yen's gains. This suggests that the initial boost from the intervention was temporary and fundamental economic factors, such as interest rate differentials, are reasserting their influence.
The coordinated intervention, the first US-Japan joint operation to buy yen since 1998, was motivated by concerns over a persistently weak yen and its potential impact on US Treasury markets, as well as Japan's financial system. Washington aimed to avoid a scenario where Japan would need to sell off large quantities of US government debt to finance unilateral intervention. The emphasis on the Federal Reserve's FIMA repo facility highlighted a desire to provide dollar liquidity without outright Treasury sales.
Despite the intervention, analysts had warned that its effectiveness would be limited unless Japan addressed underlying structural issues causing yen weakness. State Street's Masahiko Loo noted that intervention can buy time but won't alter the long-term trajectory, emphasizing that Bank of Japan policy normalization and hedging flows will be more impactful in the long run. Oxford Economics' Louise Loo suggested that the US participation was partly driven by a desire to stabilize Japanese and US bond markets.
However, the yen has underperformed its major currency peers this week due to a lack of follow-up joint intervention. This indicates that without sustained action or fundamental policy shifts, the initial impact of the intervention is proving difficult to maintain. Robin Brooks of the Brookings Institution argued that intervention cannot reverse depreciation driven by Japan's bond market as long as government bond yields remain artificially capped by the Bank of Japan's bond purchases.
