Yen Recovery Hinges on Tokyo Rate Decision Amid Weakening Support

The recent intervention to support the Japanese Yen has been a significant effort. Three weeks ago, the largest single-session defense of the Yen on record was executed, with a staggering 8.45 trillion Yen going out in one session, followed by another 5.3 trillion in coordination with the US Treasury. This operation led to a sharp decline in the Dollar-Yen pair from just under 164.00 to above 155.00.

However, since then, the pair has recovered close to half of what was lost during that intervention. The reason behind this recovery lies in the flow data, which shows that Japanese investors net bought more than 5 trillion Yen of foreign equities and long-term bonds in the two weeks leading up to August 15.

This buying spree was a clear indication that a cheaper Dollar was seen as an opportunity for investment by domestic institutional players. The official selling provided a better level to those who wanted to buy, but it also meant that reserves were converted into a discount on the carry trade.

The Bank of Japan's (BoJ) policy rate remains at 1.00%, while the Federal Reserve target range is between 3.50% and 3.75%. This differential continues to favor the US Dollar, making it challenging for the Yen to maintain its support.