Should the US dollar/yen bulls be concerned?

There are a number of reasons that have been put forward for why the Japanese authorities – and those in the US – are throwing good money away by intervening in the yen. Hysteresis plays a part, particularly after the last intervention in late April and early May failed to generate any lasting slide in the US dollar/yen. Alleged ‘fundamental' factors are also cited for the apparent failure.

The most notable here being the inability of the Bank of Japan (BoJ) to offer sufficient real returns due to the fact that it has tightened policy at a snail's pace. Even now the BoJ seems to think that the policy rate may be only half of what's required to achieve ‘neutral'. Further down the curve, JGB yields have sprinted higher, but continued BoJ purchases still mean that yields are being held below their true market-clearing level, with the consequence that the pressure falls on the yen.

Other explanations have been put forward. Indeed, many analysts talked about one yesterday, which is the insatiable appetite for the carry trade. This is weighing on other low-yielding currencies as well, such as the Swiss franc. Today, there could be another reason why the market does not seem to be particularly scared of intervention. It is that the intervention is too small. This might seem a strange thing to say. After all, BoJ data hints that last Thursday's intervention totalled over USD50bn, which could have been the single biggest one-day intervention from the BoJ on record, followed by another USD30bn-plus on Friday.

In addition, if his strategically placed note at President Trump's cabinet meeting last week is to be believed, Treasury Secretary Bessent oversaw “USD5bn-USD10bn” of yen purchases last Friday. But are these amounts really that impressive? After all, whenever something like FX intervention is mentioned, many point to the USD 9.5 tr daily turnover in the FX market to show that any currency flow through the market that's associated with intervention or any other trade is minuscule and hence cannot generate substantial movement.

The FX intervention by the BoJ has not really changed too much over the past thirty years or so, while the daily turnover in the yen FX market has risen by more than tenfold. Hence, it is not just about the small size of intervention relative to the size of the market, but also how that gap has widened dramatically over time. This could make a difference when it comes to the success of intervention.

For instance, we've mentioned just recently that intervention by both Japan and the US in 1995 to weaken the yen seemed to be supremely effective, as the US dollar/yen rallied from around 80 in 1995 to near 150 by the end of 1998. There may have been other reasons that the intervention was seemingly so successful, but our hunch is that the FX market was a very different place back then with not just far smaller volumes to today but also none of the technological advancements we see now that appear to help the market calm down when shocks occur.

Steven Barrow, Head Strategist of the Standard Bank, said these advances, such as aggregators, along with rising volumes, would also explain why the FX market is less responsive to other influences, such as economic data and monetary policy decisions, than it seemed to be some decades ago. The problem today for the BoJ and others that might be looking to intervene in the FX market is that their involvement may mean less and less even if intervention records are broken.

“If that's the case, success for the Japanese authorities is going to depend, not on the amount of intervention, but instead on the ‘signalling' effect that comes with even modest US intervention and, most probably, lifting rates to levels that make the yen attractive," said Steven Barrow.