Yen Intervention Fails as BOJ Rate Hike Remains Elusive

On August 3rd, the US and Japan joined forces to intervene in the yen, deploying nearly $100 billion to buy yen within two days. This record-breaking intervention was meant to strengthen the yen, but its effects were short-lived as the currency quickly fell back by over 200 points from its high.

The problem lies not with the intervention itself, but with the Bank of Japan's (BOJ) policy rates. According to Goldman Sachs economists, the BOJ's next rate hike is expected in January 2027, which means that the interest rate differential between the US and Japan will remain wide, making it difficult for the yen to rebound.

Goldman Sachs researchers believe that as long as the BOJ doesn't raise its rates, intervention is fighting an unwinnable war with limited bullets. This is because carry trades, which involve borrowing low-interest yen and investing in high-yield assets, continue to thrive due to the interest rate differential.

The scale of this round of intervention was unprecedented, with nearly $100 billion being deployed over two days. However, the market reaction was muted, indicating that the marginal effect of intervention is diminishing when yen depreciation aligns with macro and market fundamentals.