Yen Intervention Fails to Sway Market, Experts Warn of Limited Effectiveness

The recent intervention by the US and Japan to defend the yen has been deemed ineffective and potentially counterproductive. According to Deutsche Bank, the US Treasury's sale of euros to buy yen led to a reversal of the euro-yen exchange rate decline. The bank noted that had the US not intervened, the yen might have strengthened further.

The market reacted quickly to the intervention, with the exchange rate initially falling to 155 yen per dollar before rebounding to around 159 yen. Deutsche Bank attributed this to the market's enormous capital flows and speculative trading, which outweighed the authorities' one-off intervention.

Deutsche Bank also stated that the US administration's recommendation that Japan use the Federal Reserve's FIMA repo facility served as a signal that there was little room for further intervention. The bank estimated that the Fed made no substantive contribution to this intervention and that both the US and the Fed signaled to the market that they were not inclined to undertake large-scale additional intervention.

The analysis concludes that foreign-exchange intervention alone has limited power to halt a currency's decline, and that the underlying conditions behind its weakness must change. Deutsche Bank notes that low real interest rates are at the core of the yen's weakness and believes that if the Bank of Japan normalizes rates, the yen could eventually strengthen.