US-Japan Yen Intervention Fails as Carry Trade Reasserts Itself

A coordinated intervention by the US and Japan to prop up the Japanese yen has failed to gain traction, as the carry trade reasserts itself. The JPY has regained around half of its lost ground since the intervention in July, when it briefly rose to a rate of 155 per USD from over 163. However, the math is simple: the gap between US and Japanese 10-year Treasuries yields remains wide enough to keep the carry trade alive.

Monex's Jesper Koll told CNBC that intervention can scare speculators but cannot override where money actually wants to go. The US Treasury's main tool, the Exchange Stabilization Fund, holds under USD 220 bn in total assets, a stark contrast to the estimated USD 53 bn Japan spent in a single day (30 July) to defend its currency.

Coordination buys optics, not leverage, Manulife's Nathan Thooft told Bloomberg. Oil prices and Japan's status as a heavy energy importer are also compounding pressure on the JPY. Washington's motive for stepping in has less to do with rescuing the JPY than protecting its own bond market.

Treasury veteran Mark Sobel told Bloomberg that Japanese bond selloffs have occasionally spilled into US Treasuries and called FX intervention a 'Band-Aid' for a problem that only fiscal discipline can address.