Yen Intervention Falls Flat as Structural Factors Take Hold

Japanese authorities, backed by their US counterparts, intervened in foreign exchange markets on July 31 to stem the yen's decline against the dollar and other currencies. However, this intervention appears to be short-lived.

The Bank of Japan left its key policy rate steady instead of increasing it to close the yield gap with the US, aiding outflows of Japanese portfolio capital and putting renewed downward pressure on the yen. As a result, the Japanese currency gave up some of its gains achieved in the wake of official intervention, reverting to around 160 yen to the dollar.

Analysts point out that such interventions are of limited effectiveness because they ignore structural factors forcing the yen to even lower levels. Naomi Fink, chief global analyst at Amova Asset Management, noted that the yen has remained undervalued by several measures despite the central bank normalizing interest rates and narrowing US-Japan yield differentials.

Fink also highlighted the role of yen-funded carry trades in supporting long-duration risk assets, suggesting that the currency may remain undervalued until risk appetite, global liquidity conditions, or Japanese capital flows shift. The total size of carry trades has increased sharply as investors extend their use from buying US Treasuries to stocks to take advantage of the technology and artificial intelligence boom.