Goldman Sachs: Japan's Ample Capacity for Another Yen Intervention

Goldman Sachs analysts believe that Japan has sufficient financial capacity to intervene in currency markets again if needed. According to Goldman, Tokyo has around $1 trillion in US dollar reserves, with about $200 billion in cash or cash equivalents. This amount is likely close to the size of last month's intervention, which saw Japan deploy as much as $85 billion over two days.

The real determinant of whether Tokyo intervenes again is not about resources, but rather about the carry differential between Japanese and US interest rates, and specific data or policy surprises that could shift it. Markets currently price around a 65% probability of a 25 basis point BOJ hike in September and roughly 40 basis points of tightening by year end.

A failure to deliver this hike would put renewed downward pressure on the yen, potentially forcing Tokyo's hand. On the US side, a miss on economic data could ease pressure on the yen organically by weakening the case for further Federal Reserve tightening. Goldman cited July 2024 as an example of such a scenario, when one of the most effective BOJ-MOF interventions coincided with a US CPI miss compounded by a weaker payrolls report days later.

The underlying carry dynamic remains the dominant driver regardless of any single data point. The 10-year US Treasury yield stood near 4.69% late Wednesday against roughly 2.84% for its Japanese counterpart, a gap that would need to be closed through faster-than-expected hikes to meaningfully shift the trend behind a 45% yen depreciation over five years.