Financial Analyst/Content Writer, RADEX MARKETS
Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS.
AÇÃO
Last week, Japanese monetary authorities stepped in to defend the yen after the currency fell to a 40-year low against the US dollar. Such interventions are nothing new; the Bank of Japan has conducted similar operations in the past, most recently in late April after USDJPY threatened to push over the 160 threshold.
With that said, the latest intervention stands out for a number of reasons. The first is the sheer size of the purchase, which according to some estimates amounts to a combined $95 billion over a two-day period. The second is that fact that on the second day, the US Federal Reserve joined in to help. Coordinated interventions between the US and Japan are not unprecedented, but the last time dates back to the 2011 earthquake and tsunami, following which G7 nations came together to intentionally weaken the yen in order to stabilise global currency markets and prevent tightening fiscal conditions within the disaster-torn country.
The mechanism is very straightforward: sell dollars and buy the yen on the open market. With enough volume, currency pairs can swing violently in the desired direction, as seen last Thursday and Friday. The New York Fed is believed to have contributed $5-10 billion to the move, as per a note left on Treasury Secretary Scott Bessent’s desk, and the limits by which the treasury itself is constrained. The results are clearly visible on the USDJPY chart: from 164 on Wednesday to 157 by the weekly close.
The Japanese Yen has been weakening against the dollar in recent years due to interest rate differentials. Rates on the dollar are currently just shy of 4%, while those on the yen have been close to zero for thirty years. The Bank of Japan has slowly started to raise rates again since 2024, but the current interest rate is still only 1%, far below that of the dollar, or other currencies for that matter. This makes the yen very cheap to borrow.
The long-standing paradigm opened the door to what is known as the Japanese carry trade, which involves borrowing yen for cheap and using the borrowed money to buy high-yield foreign assets. The profit earned abroad was more than enough to cover the debt repayments back in Japan, creating a relatively risk-free trade.
Japan kept interest rates near zero for so long because the Japanese economy has been completely stagnant for a generation. Low interest rates are the primary tool to stimulate growth because they lower borrowing costs for businesses and consumers alike. When inflation and economic growth are non-existent, it is the default move for any central bank.
The problem, for the rest of the world, is that Japan has started to turn things around. Wage growth is up, inflation is rising and GDP growth is beginning to show promising signs. The Bank of Japan is doing exactly what anyone else would do: gradually raise interest rates on the yen. Unfortunately, this makes the carry trade less attractive because it reduces the spread between US yields and the Japanese borrowing costs, forcing people to unwind their positions. These positions amount to trillions of dollars, some of which are tied up in highly leveraged plays attached to US treasuries and tech stocks. The bottom line is that small adjustments on Japanese interest rates can trigger huge movements in financial markets throughout the globe, and people are rightfully terrified.
Japan cannot afford to do nothing. Inflation is rising and a weak yen will only promote more price appreciation due to higher import costs. Direct currency interventions are nothing but a short-term solution. Fundamentally, nothing will change until the yen becomes more attractive, which can only be done by increasing interest rates and incentivising markets to hold it instead of selling at the first convenience.
The US is trapped. If the yen is allowed to surge too violently, it will trigger a disorderly unwinding of global leverage that could easily crash Western financial markets, sucking trillions of dollars out of US markets. The vast leverage currently underpinning global financial markets needs to be unwound with extremely cautious hands or else the entire system goes up in flames.
There is only one real path forward. The Bank of Japan will continue to gradually raise rates, while the US Treasury will likely soften the blow by buying Japanese yen on the open market. Japanese Minister of Finance Satsuki Katayama and US Treasury Secretary Scott Bessent have released near identical statements on the matter, saying they will “not hesitate to participate in further joint intervention”.
About the Author
Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS.
Reviewed by RADEX MARKETS
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