96.5 billion US dollars hit the foreign exchange market! The US and Japan joined forces only to exchange yen for a brief resuscitation, and the battle to defend the yen evolved into a long and short tug of war

The Zhitong Finance App learned that the Japanese government used a record 15.4 trillion yen (about 96.5 billion US dollars) and intervened in the foreign exchange market to drastically reduce the trend of the US dollar against the yen from about 163 points to 155.20, but the exchange rate then rose again to around 159.50, which meant that the results of about half of the appreciation of the yen exchange rate had already returned. The joint intervention between the US and Japan almost evolved into “huge sums of money in exchange for a short respite”, but it has not completely failed.

The root cause behind the continued depreciation of the yen since this year is not speculative power itself, but rather the slow pace of interest rate hikes by the Bank of Japan and the long-term disparity in yield spreads on US and Japanese treasury bonds, which continue to push investors to borrow low-interest yen to carry out a global market interest rate trading model; at the same time, Japan is highly dependent on energy imports from the Middle East, and the Iran war has further worsened energy trade conditions in the Middle East and continued to increase pressure on the depreciation of the yen.

According to data from the Ministry of Finance, Tokyo has the ability to create drastic exchange rate reversals, yet it is difficult to reverse the medium-term trend determined by interest spreads by cash exchange intervention alone. The US allowed Japan to use the liquidity support tool set up by the Federal Reserve during the pandemic to raise dollars without directly selling US treasury bonds, which not only raised the ammunition for Japan's continued intervention, but also reduced the risk of large-scale debt sales impacting America's long-term yield; however, whether the yen can actually break out of the depreciation path still depends on whether the Bank of Japan can speed up interest rate hikes, whether energy import costs can fall back, and the market forms credible expectations for the narrowing interest rate spread between the US and Japan.

Japan has spent a record $96.5 billion in the past month to support the yen

Statistics released by Japan's Ministry of Finance on Friday show that in the past month, the Japanese authorities used a record 15.4 trillion yen (equivalent to 96.5 billion US dollars) to interfere in the foreign exchange market to support the domestic currency.

The scale of this intervention shows Tokyo's determination to push the yen away from its 40-year low. A weak yen is threatening the profits of large Japanese exporters and driving up import costs, including energy.

Japan relies on imports for almost all of its energy, 95% of which comes from the Middle East, making it vulnerable to supply disruptions caused by the war in Iran.

However, the Bank of Japan's relatively slow pace of monetary policy tightening has kept Japan's interest rates low compared to the US and other markets, prompting investors to continue to use low-cost yen to finance global transactions.

The Bank of Japan kept interest rates unchanged at the last meeting held in July, but policymakers have sent signals that they are willing to speed up the pace of tightening. The market currently believes that the probability that the Bank of Japan will raise interest rates at the next meeting in September is 65%.

Data reveals rare joint U.S.-Japan intervention

The data released by Japan's Ministry of Finance on Friday covers the total amount for the period from July 30 to August 26. Detailed daily level data will not be disclosed until quarterly data is released, possibly in early November.

On July 30 and 31, when the yen fell to close to 164 yen per dollar, the lowest level in 40 years, the Bank of Japan entered the market to buy yen, including a rare joint action with the US. A South Korean government official said at the time that the Bank of Korea was also carrying out an intervention to buy Korean won simultaneously with Japan to amplify the effects of the intervention.

According to official data released by the Bank of Japan earlier this month, the scale of intervention on July 30 may be as high as 9.6 trillion yen, which will far exceed the 6.3 trillion yen single-day intervention record set on April 30 this year.

The yen initially appreciated rapidly from 1 dollar to about 163 yen, then rose to 155.20 yen on August 3, then stabilized around 159.50 yen, and has remained at this level since August 10.

To convince the market that Japan still has the ability to implement large-scale interventions, Washington said that Tokyo can use the liquidity support tools set up by the Federal Reserve for major central banks during the COVID-19 pandemic.

This Federal Reserve instrument was launched in 2020 to stabilize the market during the pandemic and enable Japan to raise dollar liquidity without directly selling US Treasury bonds.

US Treasury Secretary Scott Bessent said earlier this month that Washington would “do whatever it takes” to support Tokyo's efforts to stabilize the yen. He also said that the sharp undervaluation of the yen may cause other economic problems, or cause other sovereign currencies to depreciate competitively or the yield on global treasury bonds to rise.