Yen's Turning Point Sets Stage for Massive Rally
The Japanese yen has been on a downward trajectory for three years, but this summer marked a turning point with a sharp reversal and joint US-Japan intervention. Despite Japan's current-account surplus and being the world's largest creditor nation, corporations have cash reserves and individuals hold significant savings. However, the conventional wisdom that high debt levels explain the weak yen does not add up.
The actual debt-to-GDP ratio is closer to 80-100% when intra-governmental holdings are stripped out. A notable voice, Scott Bessent, who has been a long-time yen bull, expects domestic institutions to bring their money back home and trigger an enormous rally. He saw this happen in 1998 and again in August 2024.
The pressure is already showing as cheap yen funding fuels technology rallies across Asia, not just in Tokyo. In Korea, nearly a quarter of the population has been playing the same trade. As the yen strengthened, margin calls in both Japan and Korea have become severe. The Japanese government intervened on July 30, followed by US Treasury involvement.
The BOJ held interest rates at 1% on July 31, with governor Kazuo Ueda stating the central bank must not fall behind the curve. However, core inflation is already at the target of 2%, and he sees a risk of it surprising to the upside. The market then put the chance of a September hike at 40%. Mizuho Financial Group estimated the US intervention was around $50bn.