BoJ Rate Hike Expected to Fuel Yen's Rally Amid Treasury Inaction

The US Treasury's intervention in the currency market to support the Yen has had almost no effect. The Treasury spent $500 million on July 31, but this was a tiny fraction of Japan's own efforts to prop up its currency. Since then, the Bank of Japan (BoJ) has been responsible for the majority of the Yen's recovery.

The BoJ is expected to raise its policy rate on September 18, which would be the highest level in three decades. This move would likely cause the Yen to strengthen further against the US Dollar. Meanwhile, the Treasury's facility, known as the FIMA repo facility, was built to help countries like Japan access dollars without selling their Treasuries. However, it has been unused and underutilized.

The Federal Reserve (Fed) facility that the Treasury asked to be enlarged so that Japan could pay for intervention through it still hasn't been drawn upon. This means that the US government's promise of defense for the Yen has not been backed up with action. The only significant move in the market has come from the BoJ's rate hike, which is expected to push the Yen higher.

Senator Elizabeth Warren had asked Treasury Secretary Scott Bessent about the cost of the intervention on August 13, but he didn't provide a figure or any details about how it was executed. The weekly US International Reserve Position shows that the ESF's position in the Yen has remained steady at around $505 million since August.

The US foreign currency reserves have been falling, with Japan selling Treasuries worth $87.8 billion in August alone. This is a significant drop from its peak of $1,239.3 billion in February. The facility built to help countries access dollars without selling Treasuries has not been used by Japan.

While the market expects the BoJ to raise interest rates and strengthen the Yen further, some analysts believe that the rate hike may be priced in already. However, as long as the BoJ follows through with its expected move, the Yen is likely to continue its upward trend.