The yen has erased about half the gains from a historic U.S.-Japan intervention less than two weeks ago. USD/JPY trades near 159, approaching the psychologically important 160 level, as a wide gap between U.S. and Japanese bond yields keeps pulling money out of the yen.
The dollar buys 159.36 yen, after the currency had strengthened to 155 in the days following the joint U.S.-Japan intervention. The pair had crossed 163 before Washington and Tokyo stepped in together to buy yen.
Yield gap still favors the dollar
Jesper Koll, expert director at Monex Group, said intervention scared markets but has not changed the underlying math. According to Monex: "Scaring markets is easy, getting markets to follow needs changed incentives and trust." He argued the action reduced speculative excess and raised risk for traders betting against the yen, without eliminating the yield advantage supporting the dollar.
The 10-year U.S. Treasury yield sits at 4.686%. That compares with 2.846% for 10-year Japanese government bonds. That gap still leaves investors with a strong incentive to hold U.S. debt over Japanese debt. Masahiko Loo, senior fixed income and currency strategist at State Street Global Advisors, said the intervention succeeded in resetting market psychology but has not yet eliminated the yield advantage supporting the dollar.
Higher Treasury yields and elevated oil prices have also restored some of the macro forces favoring the dollar, posing a particular problem for energy-importing Japan. As a result, investors still have an incentive to send money overseas as long as Japanese rates stay far below U.S. rates.
Attention turns to the BOJ
The Bank of Japan's next policy meeting is scheduled for September. John Wood, chief investment officer for Asia at Lombard Odier, said the latest intervention would probably have a limited time effect and that the BOJ might need at least two more rate increases to draw a line under the currency's weakness.
Crédit Agricole CIB points to a deeper issue: an asymmetry of investment power between the two economies, as massive U.S. investment in artificial intelligence keeps attracting capital while Japan's planned public-private investment push has yet to fully materialize. Loo added that the 160 level has become a political line in the sand, meaning a rapid move through that threshold could draw officials back into the market.
Washington and Tokyo have also highlighted the Federal Reserve's foreign and international monetary authorities' repo facility, which can supply dollar liquidity against Treasury securities and reduce Japan's need to sell U.S. bond holdings to fund intervention. Treasury Secretary Scott Bessent has signaled support for expanding that backstop, though it raises the cost of betting against the yen without removing the yield gap driving the trade.
Source: CNBC
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