Yen Intervention Backfires: US Support May Have Raised Bar for Future Interventions

The Japanese Yen intervention may have been more than just ineffective - it could have backfired. According to Deutsche Bank, Washington's support for the Yen may have raised the bar for future interventions, making them less credible and less likely.

The US Dollar to Japanese Yen (USD/JPY) exchange rate traded around 158.92 on Friday morning, little changed from the day before but still 0.25% lower over the previous five sessions. Despite this, the Yen remains stronger than its late-July lows, although much of the initial post-intervention move has been surrendered.

Deutsche Bank strategist George Saravelos argues that the US role in the operation may have been counterproductive. He believes that 'the JPY would have probably rallied more had the US not intervened at all.'

The core problem, according to Deutsche Bank, is that Washington's chosen method told the market about its willingness to support future operations. By encouraging Japan to use the Federal Reserve's FIMA repo facility rather than sell US Treasuries, Saravelos argues that Washington effectively signalled discomfort with direct Treasury liquidation.

This matters because Japan holds more than $1tn of US government debt. A conventional intervention funded by Treasury sales could put additional upward pressure on US yields at a time when Washington is already trying to stabilise the long end of the bond market.