Yen Intervention Sparks Fresh Concerns Over Undervaluation

Japan's government recently employed an unusual tactic to bolster its currency, selling approximately $59 billion in US dollars on July 30-31. This joint intervention with the United States was a rare occurrence, not seen since 1998.

The move aimed to counteract the yen's significant decline against the dollar, which had reached nearly 164 per dollar at one point. Although the yen strengthened briefly to around 157 per dollar after the intervention, it soon returned to its previous range of 158-159 by mid-August.

The reason behind the yen's persistent devaluation is largely due to interest rate differentials between Japan and the US. The Bank of Japan has been cautious about tightening monetary policy, while the Federal Reserve has maintained relatively elevated rates. This disparity makes the dollar a more attractive place for investors to park capital, fueling the carry trade.

Japanese Finance Minister Satsuki Katayama warned that further joint intervention might be necessary if the yen's undervaluation persists. Bank of America adjusted its year-end 2026 forecast for the yen to 149 per dollar, down from a previous estimate of 152, indicating a potential 6% appreciation from mid-August levels.