Can the yen be supported by the joint efforts of the US and Japan? Wall Street believes that "if Japan doesn't raise interest rates, any intervention is useless"

The US and Japan have jointly intervened, spending nearly $100 billion to support the yen, but the market has already voted with its feet: the yen's rebound is rapidly fading.

On August 3, Japan’s Ministry of Finance confirmed that it had coordinated with the US Treasury Department, deploying nearly $100 billion to buy yen within two days, marking a historical record, and warned it was prepared to act again if necessary. This marks the first joint foreign exchange intervention by the US and Japan since the 2011 Fukushima nuclear disaster.

Following the announcement, the yen briefly surged. However, the sustainability of the rebound is in question as the yen has quickly fallen back over 200 points from its post-intervention high. The price pattern almost mirrors that of the last intervention on April 30 this year—spiking before being quickly digested in the opposite direction by the market.

The core issue lies not in the intervention itself, but with the Bank of Japan. As long as the interest rate differential between the US and Japan does not narrow, the yen has no sufficient reason to rally. Goldman Sachs economists currently expect the next rate hike by the Bank of Japan in January 2027, which means the short-term rate spread of over 200 basis points between the US and Japan will persist for a long time. "The yen is still likely to weaken"—all the intervention buys is more time.

In other words, as long as the Bank of Japan does not raise rates, intervention is essentially a losing battle fought with limited ammunition. On August 3, the dollar index closed almost flat that day, and the yen ended at 156.99, up just 0.3%.

Why is intervention ineffective?

This round of intervention is unprecedented in scale. According to Bank of Japan account data, on July 31 (Thursday), the single-day intervention reached about 8.45 trillion yen (about $53 billion), setting a new record for the largest one-day intervention; on Friday, another 5.3 trillion yen (about $33 billion) was spent. Nearly $100 billion was deployed over just two days. After intervention, USD/JPY once fell to 155.20, but then immediately rebounded over 200 points. Since September 2022, Japan’s Ministry of Finance has already intervened more than $255 billion in total, yet still has not managed to reverse the long-term depreciation of the yen.

Despite this record scale, a recent Goldman Sachs report led by Mike Cahill notes, “Market reaction is at the low end of the spectrum for historical interventions, indicating that when yen depreciation aligns broadly with macro and market fundamentals, the marginal effect of intervention is diminishing—even though there's still some effect.”

Why is intervention so hard to succeed? Analysis shows that the fundamental driver of yen depreciation is the yield differential.

The US federal funds rate is far above the Bank of Japan’s policy rate, and a rate gap of more than 200 basis points means that shorting the yen and holding US dollar assets is profitable every day. As long as this interest rate gap remains, the incentive for carry trades remains strong.

John Authers, a Bloomberg columnist, notes that increasingly frequent interventions by Japan’s Ministry of Finance illustrate that each bout is becoming less effective. The market knows the Ministry’s ammunition is limited; it also knows Japan’s fiscal situation is weak; and most importantly, it knows that the only real way to reverse the yen’s downtrend—an aggressive rate hike, perhaps 100 basis points—is virtually impossible in the foreseeable future.

Why does the Bank of Japan hold back on rate hikes?

Intervention can buy time but can’t change the trend. The Bank of Japan remains the real variable.

The Bank of Japan’s current policy rate is 1%, the highest since 1995, yet hours after the latest intervention last week, the BoJ stood pat on rates and did not hike.

Jesper Koll, a longtime Tokyo-based investment banker, pointedly asks:

Bank of Japan Governor Kazuo Ueda confidently tells us he expects Japanese inflation to accelerate back above 2% in the second half of the fiscal year, but immediately chooses not to act. So why not hike? Is it because Japan’s financial system is too fragile and faster tightening risks a banking crisis?

The answer is almost spelled out. In Japan’s government bond market, over half of government debt is now held by the Bank of Japan—there simply aren’t enough other buyers. If interest rates rise quickly, bond prices would plummet and the fiscal framework could face collapse.

Robin Brooks, former Goldman Sachs FX strategist and now Brookings Institution fellow, puts it even more bluntly:

The yen’s weakness is because Japan’s high public debt load precludes allowing yields to rise freely.

He believes that yen depreciation is essentially “a symptom of a debt crisis being papered over.”

When bonds are suppressed, the yen becomes the most direct symptom of an underlying debt crisis.

Goldman Sachs’s overall conclusion: In the short term, USD/JPY’s asymmetric risk points towards further downside. If the exchange rate breaks 158 again, authorities are likely to intervene again; technically, if 155 is decisively broken, the next significant support is around 152.

But in the medium term, Goldman’s research team led by Mike Cahill believes,

Unless there is a substantial change in the policy mix or the outlook for global growth, encouraging capital repatriation will be the most powerful long-term policy tool impacting the yen exchange rate.

The implication is that intervention and gradual rate hikes are insufficient to sustainably strengthen the yen.

Goldman’s global head of FX options trading, Praneet Shah, likewise warns, “In the medium term, the policy backdrop of loose money and loose fiscal policy remains negative for the yen, unless Japan truly raises the policy rate and achieves a material inflow of foreign direct investment. Moreover, as intervention reserves are depleted, Japan will have less ammunition to defend the exchange rate in the future, possibly accumulating risks of an even larger yen depreciation.”

Long-time Tokyo-based investment banker Jesper Koll, though a self-declared Japanese economic optimist, also admits: “Yen weakness remains a high-probability path. The Bank of Japan’s inaction stems from concerns about the secondary banking system, and new fiscal policy will almost certainly lead to inflation in the end, with risks still asymmetrically tilted toward a weaker yen.”

In other words, intervention can buy some time, but not a trend. Without BoJ rate hikes, any intervention will eventually be absorbed by the market.

The biggest tail risk: Carry trade unwind

Yen intervention has global market implications largely because of massive yen carry trades.

Over the past five years, the strategy of borrowing low-interest yen to invest in high-yield assets has outperformed even the S&P 500's total returns. The prerequisite for this trade is a slow, predictable depreciation of the yen.

If the yen appreciates rapidly, carry trades are forced to unwind, which would shock global risk assets. Two years ago (August 2024), carry trades already partially unwound in a “disorderly” fashion, triggering significant volatility in global markets.

This round of intervention has already shaken carry trades out of their previously stable uptrend.

Goldman Sachs trader Jia Wen Tuea points out that this is one practical reason for US participation in the intervention: “Japan is the largest foreign holder of US Treasuries. If Japan intervened alone, it would need to sell Treasuries for dollars to buy yen, pushing up US yields—causing headaches for Washington as well.”

Goldman Sachs: Next rate hike may not come until January 2027

Goldman Sachs economists contrarily judge that inflation data are insufficient to justify a BoJ rate hike in September, maintaining their baseline forecast that the next hike will be in January 2027.

If this forecast materializes, it means the US-Japan interest rate differential will be maintained for a considerable time, the logic for carry trade remains, and the structural pressure for yen depreciation will not disappear.

A more direct consequence: This joint intervention by the US Treasury may face significant losses—the yen bought with hard cash could sharply devalue if the yen weakens further.

Koll concludes that even though he remains optimistic about the Japanese economy, he also admits “the yen is still likely to weaken,” and risks remain asymmetrically to the downside for the yen.