Nicholas Mugalli
Institutional TMT & Macro Research, AI/Semiconductors/Policy
The yen keeps weakening despite repeated intervention, with dollar-yen back at 156. The US has no choice but to fund as many rescues of the yen as the BoJ wants, since otherwise Japan would be forced to sell its US Treasuries. The BoJ meets on the 18th, and it is unclear what it can even say. x.com x.com
The yen is catching a bid as the real rate differential turns its way, with two-year nominal spreads the checkpoint. BOJ board member Takata said in Sapporo that two 0.25% hikes a year are not set in stone and, whether 0.5% or 0.75%, the BOJ must respond flexibly; overseas macro funds drove the reaction as dollar-yen fell 1.6%. Treasury Secretary Bessent expects the BOJ to do the right thing, and with the yen at the intervention zone, at least five more interventions look likely. x.com
The Japanese yen is weakening again despite the coordinated Bank of Japan and US Treasury intervention, having given back about 38% of the manufactured gain. More government intervention looks likely soon as the currency slides. x.com x.com
Currency interventions are only a band-aid for the Japanese yen's decline. Treasury Secretary Bessent and the Bank of Japan spent $90B to halt the slide when USDJPY hit 164, and the move has already recovered nearly half. x.com
Japan's intervention may mark a turn higher for the yen, but a surge like past appreciation periods is unlikely because there is no yen carry trade to unwind these days. Japan's near 5% of GDP current account surplus is also less structural than it looks: trade is near neutral, and the surplus comes from large investment income that is usually reinvested abroad automatically. x.com x.com
Japan's yen interventions only buy time, so the yen is likely to keep weakening until the Bank of Japan actually moves. Reserves only help while rates stay pinned, and each round costs reserves Japan can't replace while buying less time, making intervention a speed bump for the carry trade. Japan did not save USD/JPY 160 but rented time at it; once 162 prints, the intervention narrative dies. x.com x.com x.com x.com
The yen stays weak because intervention cannot fix Japan's deeply negative real rates and a sluggish central bank. Japan deployed up to $95.6 billion over two days, and joint intervention with the US Treasury briefly lifted the yen about 2.8%, but about 85% of that rally has evaporated, with USD/JPY back near 159. The yen has lost 30.6% against the dollar in five years. Intervention did warn speculators off the 160-164 zone, and yen net shorts fell $8.865 billion in a week, the most since 2014. … Show more
The yen has another source of support because Treasury Secretary Bessent can use the Fed's FIMA repo facility against dollar-yen. Japan can pledge US Treasuries to the Fed for dollars and sell them for yen, without dumping Treasuries and pushing US yields higher. The facility's limit is reportedly $60 billion per counterparty, and Bessent has already advocated expanding it. x.com
The yen will not strengthen meaningfully unless Japanese yields spike far higher, and intervention will not change that over the longer term. USD/JPY will not reach 150 or lower without a very big jump in Japanese yields; only yields going parabolic faster than before would drive it down. The bond market is smarter than the BoJ and Fed combined, even with Japan's 2-year yield above 1.57%, a 30-plus-year high, per Barchart. x.com
The US needs a weaker yen, so Treasury Secretary Bessent's visible note to "Buy Japanese Yen (JPY) $5-10 bil," chickenfeed in any case, looks like a psyop and misdirect, calling for the opposite positioning; the buying was a chunk of carry trade to close. Per @TreasuryBonds1, Japan reportedly spent about $53 billion buying yen in a single day, its largest intervention ever, and Bessent called the yen very undervalued. x.com x.com
The yen is strengthening sharply toward ¥153-154 as the Bank of Japan hikes rates and intervenes, starting to unwind the global carry trade funded by cheap yen. That is not a normal FX move but a systemic margin call on every leveraged position funded in yen, with the BOJ now playing its own game rather than following the Fed. x.com
The yen remains under pressure, and the Bank of Japan's record interventions look increasingly hard to sustain. Japan's foreign exchange reserves fell by $77 billion after record interventions in May. The BOJ wants demand-driven inflation from rising wages and consumption, but a sliding yen risks supply-side inflation instead, leaving it between a rock and a hard place. x.com x.com
