US Intervention in Yen Exchange Rate Masks Underlying Economic Risks

The recent interventions in currency markets by the Bank of Japan and the US Treasury to boost Japan's yen have had a temporary impact, but experts warn that the alarm bells are still ringing.

Last month, the yen crashed through the 'line in the sand' at 162 yen-to-the-dollar level, prompting the BoJ and US Treasury to intervene. Over two days, they spent an estimated $87 billion and up to $10 billion respectively to buy yen, driving the exchange rate up to a peak of 155.21 yen to the dollar.

However, the exchange rate has since slipped back to just over 157.7 yen to the dollar after hitting 158.40 on Friday. The US Treasury's decision to offer the BoJ a Federal Reserve 'repo' facility underscores the mutual vulnerabilities of both countries and highlights the potential risks for the global economy.

The interventions may have driven short sellers from the market, but they haven't addressed Japan's economic fundamentals. Its extreme levels of government debt (over 200% of GDP), rising inflation, and suppressed bond yields will continue to pressure the yen unless drastic measures are taken.