Yen Tests Limits as Intervention Fails to Stem Currency Slide

The yen has broken through the crucial level of 160 per dollar for the second time in recent weeks, raising concerns about Japan's ability to defend its currency through intervention. Despite a record $96.4 billion spent on supporting the yen over the past month, the exchange rate has slipped back above 160.

The intervention effort, which included coordinated buying by Japan and the United States for the first time since 1998, initially worked in July, pushing the yen above 155 per dollar. However, the subsequent rebound demonstrates why markets remain skeptical about the effectiveness of intervention alone in reversing currency trends.

Japan's real interest rates remain deeply negative, making its assets less attractive to investors and giving them a structural reason to sell or borrow yen. This makes it difficult for Japan to defend its currency through intervention alone, as any gains are quickly eroded when volatility settles.