USD/JPY at Crossroads as Yen Continues to Fall Despite Intervention
The Japanese Yen (JPY) has seen its best session in weeks on Wednesday, but it still appears to be a losing position. The USD/JPY pair printed just above 160.00 in Asian hours, marking its highest level since late July, before reversing and trading near 158.50 due to a meeting readout and renewed intervention chatter.
Six weeks ago, Tokyo and Washington conducted their first joint Yen-buying operation since 1998, with an enormous invoice of $60 billion on Thursday and $25 billion on Friday, followed by another tranche the following Monday and an American leg sized between $5 to $10 billion. The pair fell from close to 164.00 to a low near 155.25.
That's roughly nine Yen for over $100 billion of reserves, with five weeks passing before the tape returned above 160.00, giving away almost all of it. Wednesday's two-Yen drop cost nothing at all, following a readout of a meeting between Japan's finance minister and the US Treasury Secretary, in which both sides agreed that orderly moves matter.
However, the deterrent is getting cheaper and smaller at the same time, as the market has correctly worked out that firepower is not the binding constraint. Tokyo secured access to a Federal Reserve facility that lets it raise Dollar liquidity against Treasury collateral rather than selling bonds outright, so the reserve position is not the ceiling on how often it can act.
The differential between Japanese and US bond yields continues to be driven by an expansionary fiscal programme and debt service arithmetic, rather than expectations of tighter policy. The 10-year Japanese government bond yield reached 3% this week for the first time since 1996, which should technically rescue the Yen but doesn't due to its underlying causes.
The one lever that genuinely changes the carry is the September 18 Bank of Japan decision, with signals pointing towards a rate hike. Even a quarter point would leave the gap to a Federal Reserve priced around two-thirds for a hike on September 16 more than two and a half percentage points wide.