BOJ's Hawkish Stance Fails to Change Yen's Weakness: Intervention Line Precarious
Introduction
In late June 2024, the yen remained weak around 161.93 per dollar, just a stone's throw from the near 40-year low of 161.96. Although the Bank of Japan raised its policy rate to 1% last week, the highest in 31 years, and the latest meeting minutes showed most board members favored gradual further rate hikes, the market widely believes that a single rate hike or temporary intervention cannot fundamentally reverse the yen's persistent weakness. The widening US-Japan interest rate differential and the sustained appeal of carry trade make it difficult to resolve the structural depreciation pressure on the yen.
US-Japan Finance Ministers' Communication Signals Intervention
On June 23, the yen briefly touched 161.93 per dollar before a small rebound, coinciding with a virtual meeting between the Japanese and US finance ministers. Japanese Finance Minister Satsuki Katayama confirmed that she had communicated with US Treasury Secretary Bessent for nearly an hour on global financial market conditions and the Middle East situation, reiterating that “a solid consensus has been established between Japan and the US that bold action should be taken when necessary.”
The outside world widely speculates that Japanese authorities may have implemented “small-scale” yen-buying intervention during the consultation, combined with “rate checks” inquiring about exchange rate levels at financial institutions, temporarily suppressing the yen's depreciation momentum. However, the actual scale of intervention and whether a new round of forex intervention occurred will not be known until the BOJ releases data at the end of July.
Earlier, between late April and late May, the Ministry of Finance and the BOJ spent a total of about 11.73 trillion yen to rescue the market. Although this briefly pulled the yen back from 160.70 to the 155-156 range, the effect of the intervention faded quickly, and the yen soon returned to weakness.
Diminishing Marginal Effectiveness of Intervention
Daisuke Yamaguchi, senior Japan economist at Oxford Economics, pointed out that the continued recovery of the US economy, the widening US-Japan interest rate differential, and the uncertain outlook for Japan's finance minister are the root causes of the yen's persistent weakness. Currently, the US federal funds rate is in the range of 3.50% to 3.75%, while Japan's policy rate is only 1%, a gap of over 250 basis points; the 10-year US Treasury yield is about 4.45%, while Japan's 10-year government bond yield is about 2.65%, a gap of about 180 basis points. This means carry trade, which involves selling yen to invest in high-yield assets to capture the interest rate differential, remains highly attractive.
Chen Yan, Executive Director of the Japanese Enterprise (China) Research Institute, believes that the timing of the communication between the US and Japanese finance ministers is delicate: on one hand, Japan can use it to convey the pressure of yen depreciation to the US and test the US attitude toward intervention; on the other hand, by meeting, they release a signal that regulators are monitoring exchange rate fluctuations, preemptively curbing excessive yen depreciation. But he also emphasized, “The foreign exchange market is huge, and the amount of yen the Japanese government can deploy is limited; the effect of intervention is only temporary and cannot fundamentally change the weak trend.”
Where Is the Next Intervention Line?
Takeshi Yamamoto, a trader at Sumitomo Mitsui Trust Bank's New York branch, believes Japanese authorities may hope to convey through the US-Japan meeting that “the threshold for coordinated action with the US is not high.” Although intervention concerns are rising, the fundamental weakness of the yen has not changed, and USD/JPY may test the 162 level this week.
Ray Attrill, Head of Forex Strategy at National Australia Bank, said that USD/JPY is currently trapped between two forces: “above is intervention risk, below is the persistent carry appeal of shorting the yen.” He expects that within the 162-163 range, the market may once again trigger Japanese authorities to step in.
Monetary Policy Signals Clear but Effect Limited
The latest BOJ summary of opinions from the June monetary policy meeting shows that many board members are concerned about upside risks to inflation from supply shocks such as oil prices and tend to favor gradual further rate hikes. Members expressed that as long as the economy and prices move in line with expectations, the BOJ must maintain a stance of further rate hikes. One member even said, “The BOJ must raise rates every few months” and should raise the policy rate to near neutral levels as soon as possible.
Currently, market institutions have some differences in their views on the subsequent rate hike path, but the direction is converging. Goldman Sachs expects the BOJ to maintain a pace of roughly one rate hike every six months; Mitsubishi UFJ believes there will be another rate hike later this year. Chen Yan believes the BOJ will likely maintain a cautious pace, with gradual rate hikes at a frequency of every six months to a year. If there are special circumstances such as a rapid rise in inflation or a sharp depreciation of the yen, the central bank may consider raising rates earlier.
Conclusion
Against the backdrop of a widening US-Japan interest rate differential and persistent carry trade appeal, even if the BOJ adopts a “hawkish” posture, it will be difficult to reverse the yen's weak pattern in the short term. A single intervention can only have a temporary effect but cannot fundamentally change the market's structural expectations of yen depreciation. The future direction of the yen largely depends on the pace of the Fed's monetary policy shift and whether the BOJ can effectively raise rates to a neutral level. Before these two major variables become clear, the yen may continue to operate under pressure in a tug-of-war between intervention risk and carry trade appeal.
