Joint Intervention Fails to Sustain Yen Rally Without Rate Hikes

A joint intervention by Japan and the US has temporarily boosted the yen, but analysts are skeptical about its long-term impact unless the Bank of Japan (BOJ) raises interest rates more quickly.

The BOJ spent $70 billion in late April and early May to prop up the yen, but the rebound was brief. This time around, the authorities in Tokyo and Washington have joined forces for the first time in 15 years, wagering that a united front will be more effective than solo intervention.

The yen rose 1% in early Asian trade on Monday to a high of 155.20 per dollar, its strongest in about three months, moving away from the 40-year low of 163.99 it hit in July.

Analysts said the coordinated intervention triggered a squeeze in short positions - the largest in nearly two years - and increased the risk of follow-up action, including faster rate hikes from the central bank. Fred Neumann, chief Asia economist at HSBC, said, 'A surprise hike by the Bank of Japan would go a long way to reset expectations around the central bank's determination to tighten monetary policy.'

Nomura also suggested that Japan may have sufficient ammo to spend up to 30 trillion yen targeting levels of at least 154 yen to trigger momentum traders.