SINGAPORE — Joint intervention by the United States and Japan in the foreign exchange market has increased pressure on traders betting on further weakness in the yen. However, several analysts believe the Japanese currency will struggle to sustain its gains without more aggressive interest rate hikes from the Bank of Japan (BOJ).

As reported by Reuters, the coordinated intervention was the first in 15 years. The move was seen as sending a strong signal to markets that Washington and Tokyo share a common interest in halting the yen's depreciation.

Even so, analysts said the main driver of the yen's direction remains the BOJ's monetary policy. The wide interest rate differential between Japan and the United States continues to be viewed as the primary factor behind the Japanese currency's weakness.

Previously, Japan spent around US$70 billion between late April and early May to support the yen. However, the resulting appreciation proved short-lived. A similar pattern was seen following Japan's unilateral interventions in 2022 and 2024.

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In Asian trading on Monday (3 August), the yen strengthened by around 1% to 155.20 per US dollar. That marked its strongest level in nearly three months after it had weakened to a 40-year low of 163.99 per US dollar in July 2026.

The yield on Japan's two-year government bond also rose to 1.54%, its highest level since May 1995. The increase reflects market expectations for further BOJ policy action.

Markets Await BOJ

Analysts said the coordinated intervention triggered large-scale short covering in the yen. The move also raised expectations that the BOJ would accelerate interest rate increases.

"A surprise interest rate hike by the BOJ would help shift market expectations about the central bank's commitment to tightening monetary policy," said HSBC Chief Asia Economist Fred Neumann.

According to Neumann, the joint intervention by the US and Japan sent a strong message to the market. However, without support from monetary policy, its impact on strengthening the yen is likely to prove temporary.

Market data showed speculators still held net short positions in the yen worth around US$12.5 billion. Those positions have been driven by oil price volatility linked to the Iran war, as well as the still wide interest rate gap between Japan and other advanced economies.

BBH Head of Global Market Strategy Elias Haddad said history suggests coordinated intervention is generally more effective than unilateral action. Even so, he noted that reversing currency trends typically takes time.

Meanwhile, BGIM Portfolio Manager Carol Lye said the open support from US Treasury Secretary Scott Bessent for a stronger yen has enhanced the credibility of the latest intervention.

Bessent also said the US government is considering expanding the capacity of the Federal Reserve's FIMA repo facility, which provides US dollar liquidity to foreign central banks.

According to Lye, the move could strengthen Japan's ability to intervene in the foreign exchange market.

Nomura estimates Japan still has scope to spend as much as JPY30 trillion to defend the exchange rate. If the intervention succeeds in pushing the yen beyond 154 per US dollar, the currency could continue strengthening towards 150 per US dollar.

Nevertheless, some analysts remain sceptical about the yen's ability to maintain its gains without follow-up action from the BOJ.

On Friday (31 July), the BOJ warned for the first time that core inflation could exceed its target. The central bank also said its next policy discussions would focus more heavily on upside inflation risks, increasing the possibility of an interest rate hike as early as September.

HSBC currency strategists Joey Chew and Paul Mackel said the US dollar against the yen is unlikely to enter a sustained downtrend without faster BOJ interest rate increases. They added that the Japanese government also needs to demonstrate stronger support for the yen while scaling back its fiscal expansion ambitions.

Meanwhile, BNP Paribas FX strategist Chandresh Jain argued that the yen's recent strength presents an opportunity for investors to rebuild long US dollar positions against the Japanese currency through options.

He expects the yen to resume weakening, although its decline is likely to be capped at around 163.5 per US dollar. (ARF/LM)

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