Yen's 6% Rally Fuelled by Rate Expectations, Not US Intervention

The Japanese yen has rebounded by about 6% since late July, driven largely by expectations of a Bank of Japan policy-rate rise on September 18. In contrast, US involvement in stabilizing the yen has been limited to a single joint operation on July 31.

Data from the Exchange Stabilization Fund (ESF) shows that it bought approximately $500 million of yen between July and August, but subsequent operations have been minimal. The ESF's balance sheet totals $217.028 billion, while its net worth is $43.651 billion, with usable US FX reserves at $38.576 billion on September 4.

The FIMA repo facility has offered overnight repo against Treasuries, capped at $60 billion per counterparty, but since April 2020 it has been zero in 73.9% of weeks. Japan's foreign securities holdings fell by $87.8 billion in August, while the US 30-year yield was 5.28% on September 9.

Markets are pricing a Bank of Japan quarter-point step as close to fully priced, with expectations for further tightening extending above 95% by March 2027. The yen's recent rally is considered fundamentally driven by rate expectations rather than joint interventions from the US Treasury.