Bessent Backs Himself for Yen Intervention Success Amid Undervaluation Concerns

In a bold move, US Treasury Secretary Scott Bessent is backing himself for a successful intervention in the foreign exchange market. The recent joint intervention between Washington and Tokyo was the first yen-buying exercise since the Asian FX crisis in 1998.

Bessent's confidence in the intervention's success may be rooted in his conviction that the yen is undervalued, with estimates suggesting it is around 20% undervalued against the dollar. According to ING FX Strategist Francesco Pesole, this undervaluation is evident when using their Behavioural Equilibrium Exchange Rate (BEER) model.

While some may be skeptical about the effectiveness of joint US-Japan intervention in a $480bn per day market, history has shown that policymakers can have an impact on FX moves. In 2023, Sweden's Riksbank and Mexico's Banxico both made policy announcements that helped to influence their currencies.

Bessent is betting that the downside for the yen is limited, and a weaker USD/JPY will help US manufacturers compete more, both in Japan and in third markets. To achieve this, he believes Japanese interest rates need to rise, with speculation building around an earlier Bank of Japan hike in September.

The success of Japan's growth strategy, which aims to deploy JPY370tr ($2.3tr) of public-private investment by 2040, also has a clean link to the yen. Asian nations like Japan and Korea acknowledge that weak productivity growth amidst ageing populations is leading to investment outflows in search of higher returns.

Ultimately, lasting yen appreciation depends on higher domestic returns, stronger growth, and a supportive Bank of Japan policy path. With our base case assuming US-Japan growth and interest rate differentials narrow, we forecast USD/JPY at 158 by the end of 2026 and 152 by the end of 2027.