Joint U.S.-Japan Intervention Fails to Halt Yen's Decline

The United States and Japan jointly intervened in the yen market to prop it up, deploying nearly USD 100 billion over two days. However, analysts argue that this intervention is merely buying time as the root cause of yen depreciation lies in Japan's high debt burden.

Goldman Sachs notes that the interest rate differential between the U.S. and Japan remains wide, with a spread exceeding 200 basis points, making it difficult for the Bank of Japan to raise rates. This reluctance is due to concerns about the fragility of Japan's financial system and the risk of triggering a banking crisis.

The Bank of Japan currently holds more than half of Japan's outstanding debt, and if rates were to rise sharply, Japanese government bond prices would plummet, putting the entire fiscal framework at risk of collapse.

Goldman Sachs forecasts that the Bank of Japan's next rate hike could be delayed until January 2027, which would allow carry trades to resurge and potentially drive the yen significantly weaker again.