Key Highlights

  • The yen has slid back toward pre-intervention levels just two weeks after a historic joint US-Japan effort to support the currency
  • The dollar fell from around 164 yen to about 156 yen following the intervention but has since climbed back to around 159 yen
  • Data shows investors have been consistent sellers of the yen every trading day since the intervention took place
  • Analysts point to the carry trade, in which investors borrow cheap yen to invest in higher-yielding assets, as a key Factor behind the currency's renewed weakness

Yen Gives Back Gains From Historic Joint Intervention

Two weeks after a historic joint US-Japanese effort to stop the yen's slide, the currency has moved back toward levels seen before the intervention took place. The US Treasury secretary carried out the first bilateral intervention in the yen since 1998, helping pull the dollar down from around 164 yen to about 156 yen using euros to fund the purchase, an unusual step taken without prior consultation with European counterparts.

Since then, data from a major Custodian bank shows investors have been consistent and sizeable sellers of the yen every trading day following the intervention. This has pushed the Exchange Rate roughly halfway back toward where it started before the US stepped in, with the dollar trading around 159 yen and many of the conditions in place for it to climb further.

Carry Trade Reasserts Itself Despite Intervention Risk

Much of the renewed pressure stems from the carry trade, in which investors borrow in a low-yielding currency such as the yen and invest the proceeds in higher-yielding Assets such as US Government Bonds and technology stocks. The strategy tends to thrive in low-volatility market conditions and ebbs and flows with broader speculative sentiment. Opinion is divided among analysts over how much the carry trade is driving the current dollar-yen dynamic, though most agree it helps explain the scale of the currency's moves given how far US government bond yields have risen relative to Japanese yields.

A currency strategist at a major Japanese bank pointed to several signals suggesting the carry trade is exerting renewed pressure, including a rapid rise in yen transfers from Japanese bank branches in Tokyo to overseas branches for use in higher-yielding investments. Speculative bets against the yen remain large by historical standards despite a pullback following the intervention, with negative positioning concentrated heavily during London and US trading hours, a pattern the strategist said points to speculative rather than commercial activity.

Analysts See Limited Risk of Disorderly Unwind for Now

The same strategist said the risk of a disorderly unwind of the carry trade appears low for now, since the likelihood of higher Japanese interest rates is already well understood by markets and the US economy does not appear close to recession, even though recent US retail sales data came in surprisingly weak. Still, the strategist cautioned that any unwind, if it were to occur, could weigh on a broad range of assets, from US technology stocks to emerging market financial assets.

Ultimately, the yen's persistent weakness against the dollar continues to hinge on the same underlying factors: elevated US Debt yields driven by sticky Inflation and Monetary Policy uncertainty, combined with the Bank of Japan's cautious approach to raising interest rates. Analysts note that intervention tends to be effective only when those underlying conditions shift, meaning continued dollar strength could keep testing the resolve of US and Japanese policymakers in the weeks ahead.