The impact of yen intervention is rapidly fading—after rebounding from a 40-year low of 164 to 155, it is once again approaching the 160 mark. The core issue has shifted from 'whether to intervene' to 'when to raise rates': the exclusion of the European Central Bank from the coordination mechanism has significantly undermined the credibility of joint intervention; market consensus is increasingly clear that without accompanying rate hikes by the Bank of Japan, any support for the yen will be short-lived. September or December? This debate over the timing of a rate hike is now shaping the fate of global carry trades.
The impact of yen intervention is fading. After rebounding from a near-40-year low of ¥164 per US dollar to around ¥155, the yen has weakened again and currently trades at 159.28. Market attention has shifted from the U.S. Treasury Secretary to the Bank of Japan, with the timing of a potential rate hike becoming the central focus of current foreign exchange market dynamics.
According to the Financial Times on Tuesday, investors widely believe that the joint intervention lacked a 'unified message,' thereby diminishing its market impact—the European Central Bank was not informed in advance and thus did not participate in the coordinated action. Van Luu, Global Head of Solutions Strategy at Russell Investments, stated that the intervention’s effect is waning and that 'more measures will be needed' to provide sustained support.
Market consensus is increasingly clear: without accompanying interest rate hikes by the Bank of Japan, any currency intervention is unlikely to be sustainable. This expectation is reshaping traders’ pricing logic and directly channeling pressure onto the Bank of Japan’s policy decisions.
Limited effectiveness of intervention puts yen under renewed pressure
The U.S.-Japan joint intervention set a historical precedent, but its market impact has been significantly diminished. After rebounding from a four-decade low of approximately ¥164 to around ¥155, the yen recently fell below the 160 mark again, hitting an intraday low of 159.36 on Monday.
Guy Miller, Chief Market Strategist at Zurich Insurance, noted that excluding the European Central Bank from the coordination mechanism 'was unhelpful for the market,' as inter-central bank coordination could have sent a signal of a 'unified message.' This stands in stark contrast to the coordinated G7 intervention following the 2011 earthquake in Japan, which successfully pushed the yen lower.
The latest data from the U.S. Commodity Futures Trading Commission shows that traders in the futures and options markets still hold net short positions in the yen, although position sizes have declined somewhat since the intervention. Japan’s unilateral interventions in April and May similarly provided only temporary support, and historical experience has further dampened market expectations for the durability of the current intervention.
Rate hike expectations rise: September or December?
The Bank of Japan’s next move has become the market’s focal point. The current policy rate stands at 1%, while the Federal Reserve’s target range is 3.5% to 3.75%. This interest rate differential remains the fundamental driver behind the yen’s persistent depreciation.
Minutes from the Bank of Japan’s July meeting revealed that one board member explicitly stated that, given core CPI inflation is now approaching 2%, 'concerns about upside inflation risks should outweigh those in the past, and the pace of policy rate hikes could be faster than market expectations.' Analysts at Goldman Sachs Tokyo cited this comment as evidence that the balance of risks clearly tilts toward an earlier rate hike.
Traders are currently pricing in approximately a 50% probability that the Bank of Japan (BOJ) will hike rates by 25 basis points in September. Citi analysts forecast a "regime shift" in BOJ policy, entailing a more aggressive pace of rate hikes starting in September, with the policy rate reaching 2% by the end of next year.
However, several institutions remain cautious about a September rate hike. Masayuki Nakajima, an analyst at Mizuho Securities, argues that from a domestic economic perspective, the bar for action in September remains high—Japan has experienced decades of low growth, low inflation, and ultra-low interest rates, and concerns persist over the impact of rate hikes on mortgage-holding households and small and medium-sized enterprises (SMEs). He notes that the BOJ prefers a gradual normalization path, typically observing market conditions for about six months after each 25-basis-point hike, making December the most natural timing—and the baseline forecast of Mizuho’s Tokyo macro team.
Barclays analysts Naohiko Baba and his team also list October as their baseline scenario but state they are 'on alert' for a potential September move. They highlight that the Summary of Opinions to be released by the BOJ on August 10 is critical—if multiple board members clearly signal support for an early rate hike, the likelihood of action in September would rise significantly.
Notably, if the BOJ were to raise rates in September, the interval between consecutive hikes would shorten to roughly three months—a pace not seen since the asset price bubble unwinding phase of 1989–1990—marking a historic policy turning point.
Dual Risks of Yen Undervaluation and Carry Trade Unwinds
According to calculations by Professor Costas Milas of the University of Liverpool, the yen is currently undervalued by approximately 21%, and the divergence between exchange rates and interest rate differentials has significantly exceeded normal ranges—this forms a key basis for U.S. and Japanese authorities characterizing the market as 'disorderly.'
Should the yen weaken further below 160 against the dollar, it would intensify domestic inflationary pressures in Japan, heighten U.S. policymakers’ anxiety over excessive dollar strength, and trigger market concerns about whether Japan might need to sell portions of its sizable U.S. Treasury holdings to finance larger-scale foreign exchange interventions.
Some investors are drawing parallels between current market conditions and August 2024, when the yen surged abruptly, triggering severe volatility across global financial markets. Van Luu notes that current yen short positions are heavily concentrated and valuations are deeply depressed; if a dovish pivot by the Federal Reserve coincides with a hawkish shift by the BOJ, the risk of rapid carry trade unwinds cannot be ignored.
However, Ayako Fujita, Chief Japan Economist at JPMorgan, holds a more moderate view. She argues that even if the BOJ accelerates its pace of tightening, near-term interest rate differentials will remain sufficiently wide, limiting the likelihood of large-scale, rapid carry trade liquidations. Convergence of long-term Japanese government bond yields with those of other major economies is a 'more distant prospect' and does not pose a systemic risk in the near term.