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Analysis of the Japanese Yen

The Japanese Yen is currently at a pivotal point following an unprecedented coordinated intervention by the United States and Japan that began on July 30. Notably, prior to this intervention, the USD/JPY pair traded at around 164 yen, marking the lowest level for the yen in four decades.

The initial intervention resulted in a troubling decrease for the USD/JPY pair, plummeting over 400 pips or 2.4% in just one day. A subsequent intervention on July 31 further impacted the pair, leading to an additional drop of 200 pips. In the aftermath, we have witnessed a minor recovery from approximately ¥155 to around ¥158, which aligns closely with the lower limit of the 200-day simple moving average for the pair. Understandably, market participants are apprehensive, especially since both US and Japanese authorities have expressed their readiness to intervene again if necessary.

Japan has engaged in currency market interventions several times since 2022, but the current joint action with the US is comparatively rare, reminiscent of similar efforts during the late 1990s and again in 2011. Historically, these coordinated interventions have served as significant turning points in the trend of the USD/JPY pair.

The compelling question now is why the US and Japan have chosen to collaborate on this matter at this juncture. The primary motivation behind the US intervention stems from the need to prevent a destabilizing increase in national bond yield rates. As the largest foreign holder of US government debt, Japan customarily funds interventions through the sale of Treasury bonds. To defend the bond market from a massive sell-off, the US Treasury facilitated its intervention by selling euros from its reserves to procure yen.

Aaron Hill, the Chief Market Analyst at FP Markets, noted that depending on interventions alone may not be enough to bolster the yen significantly. He stated, "To prevent further depreciation of the yen, it is unlikely that intervention alone will suffice. The Bank of Japan would need to step up and increase the official interest rate several times to issue a strong message to the market. Nonetheless, to maintain structural demand for the yen, an external catalyst may also be necessary to encourage capital repatriation towards yen-based investments in Japan. Without such actions, opportunistic buyers may seize on declines in the USD/JPY pair, aiming to reach pre-intervention levels in the near future."

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About FP Markets

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