Wall Street believes Japan's currency interventions are futile without rate hikes.

Article by Long Yue, Wall Street Journal

The U.S. and Japan jointly intervened with nearly $100 billion to support the yen, but the market is already voting with its actions: the yen’s rebound is rapidly fading.

On August 3, Japan's Ministry of Finance confirmed that it had jointly intervened with the U.S. Treasury, spending nearly $100 billion to buy yen over two days—the largest such intervention in history—and warned that it would not hesitate to act again if necessary. This marked the first coordinated forex intervention by the U.S. and Japan since the Fukushima nuclear disaster in 2011.

Following the message, the yen initially strengthened significantly. However, the sustainability of this rebound is questionable, as the yen has quickly retreated more than 200 points from its post-intervention high, mirroring almost exactly the price action seen after the intervention on April 30 of this year—rallying sharply before being swiftly reversed by the market.

The core issue is not the intervention itself, but the Bank of Japan. As long as the U.S.-Japan interest rate differential does not narrow, there is no strong reason for the yen to rebound. Goldman Sachs economists’ current baseline expectation is that the Bank of Japan’s next rate hike will occur in January 2027, meaning the more than 200-basis-point short-term rate differential between the U.S. and Japan will persist for the long term—“the yen is likely to remain weak”—and the intervention merely buys time.

In other words, as long as the Bank of Japan does not raise interest rates, intervention is like using limited ammunition in a battle that cannot be won. On August 3, the U.S. Dollar Index closed nearly flat, while the yen ended at 156.99, rising just 0.3%.

The scale of this intervention is unprecedented. According to data from the Bank of Japan’s accounts, the single-day intervention on July 31 (Thursday) amounted to approximately ¥8.45 trillion (about $53 billion), setting a new historical record for the largest single-day intervention; on Friday, another ¥5.3 trillion (about $33 billion) was deployed. Combined, the two days totaled nearly $100 billion. Following the intervention, the USD/JPY pair briefly dropped to 155.20, but quickly rebounded by over 200 points. Since September 2022, the Japanese Ministry of Finance has cumulatively intervened more than $255 billion, yet has consistently failed to halt the yen’s long-term depreciation trend.

Despite this record-sized intervention, Goldman Sachs’ research team (led by Mike Cahill) noted in their latest report that “the market response has been at the lower end of historical ranges, suggesting that the marginal effectiveness of intervention is diminishing when yen depreciation aligns with broader macroeconomic and market fundamentals—though it still has some impact.”

Why is intervention difficult to be effective? Analysis suggests that the fundamental logic behind the yen's depreciation is the interest rate differential.

The U.S. federal funds rate is significantly higher than the Bank of Japan’s policy rate, with a spread of over 200 basis points, meaning that shorting the yen and holding U.S. dollar assets generates daily profits. As long as this interest rate differential persists, carry trades will remain attractive.

Bloomberg columnist John Authers notes that the increasing frequency of interventions by Japan’s Ministry of Finance precisely demonstrates that each intervention is becoming less effective. The market knows that the Ministry’s resources are limited, that Japan’s fiscal position is weak, and that the only truly effective way to reverse the yen’s decline—significantly raising interest rates, which some estimates suggest would require a 100-basis-point hike—is virtually impossible in the foreseeable future.

Intervention can buy time, but it cannot change the direction. The Bank of Japan is the real variable.

The Bank of Japan's current policy rate is 1%, the highest since 1995, but following last week's intervention, the Bank of Japan chose to hold steady and did not raise rates.

Jesper Koll, a long-term investment banker based in Tokyo, asked directly:

Bank of Japan Governor Kuroda confidently told us he expects inflation in Japan to accelerate back above 2% in the second half of the fiscal year, yet he chose not to act. So why exactly are you not raising rates? Is it because Japan’s financial system is too fragile, and faster rate hikes could trigger a banking crisis?

The answer is almost on the table. In Japan’s government bond market, more than half of the debt is held by the Bank of Japan—because there are no other sufficient buyers. If interest rates rise rapidly, Japanese government bond prices will plummet, putting the entire fiscal structure at risk of collapse.

Robin Brooks, former Goldman Sachs foreign exchange strategist and current researcher at the Brookings Institution, put it more plainly:

The yen is declining because Japan's high public debt prevents the country from allowing yields to rise freely.

He believes that the yen's depreciation is essentially a symptom of "a debt crisis that has been concealed."

Bonds are suppressed, and the yen becomes the most direct symptom of a hidden debt crisis.

Goldman Sachs' overall conclusion is that, in the short term, the asymmetric risk for USD/JPY points to further downside; if the exchange rate breaks above 158 again, authorities are likely to intervene once more. From a technical perspective, if 155 is effectively broken, the next key support is near 152.

However, in the medium term, the Goldman Sachs research team (led by Mike Cahill) believes that

Unless there is a substantial change in policy mix or global growth prospects, encouraging capital repatriation will be the most powerful long-term policy tool influencing the yen's exchange rate.

In other words, intervention and gradual rate hikes are insufficient to sustainably strengthen the yen.

Praneet Shah, Global Head of FX Options at Goldman Sachs, also warned, “In the medium term, the policy backdrop of loose monetary and fiscal policy remains bearish for the yen, unless Japan genuinely raises policy rates and achieves substantial foreign direct investment inflows. Additionally, as intervention reserves are depleted, Japan’s capacity to defend the yen in the future will diminish, potentially accumulating risks for larger yen depreciation.”

Jesper Koll, an investment banker based long-term in Tokyo who considers himself an optimist about Japan’s economy, acknowledges: “A weaker yen remains the most likely path. The Bank of Japan’s inaction stems from concerns about the secondary banking system; and the new fiscal policy will almost certainly ultimately lead to inflation, with risks still asymmetrically tilted toward a weaker yen.”

In other words, intervention can buy time, but it cannot create a trend. The Bank of Japan’s decision not to raise interest rates means any intervention will ultimately be absorbed by the market.

Yen intervention moves global markets for another deeper reason: the massive scale of yen carry trades.

Over the past five years, the strategy of borrowing low-interest yen to invest in high-yield assets generated returns that even exceeded the total return of the S&P 500. This trade assumed a slow and predictable depreciation of the yen.

When the Japanese yen rapidly appreciates, carry trades are forced to close, impacting global risk assets. Two years ago (August 2024), carry trades were partially unwound in a "disorderly manner," causing significant volatility in global markets.

This round of intervention has clearly disrupted carry trades from their previously stable upward trend.

Goldman Sachs trader Jia Wen Tuea noted that this is also one of the practical logic points behind U.S. involvement in intervention: “Japan is the largest foreign holder of U.S. Treasury bonds. If Japan intervenes alone, it would need to sell U.S. Treasuries to buy dollars and purchase yen, pushing up U.S. yields—which would also be a problem for Washington.”

Goldman Sachs: The next rate hike may occur in January 2027

Goldman Sachs economists take a contrarian view: inflation data is insufficient to justify a Bank of Japan rate hike in September, maintaining their baseline forecast that the next hike will occur in January 2027.

If this prediction comes to pass, it means the U.S.-Japan interest rate differential will remain unchanged for a prolonged period, the carry trade rationale will still hold, and the structural depreciation pressure on the yen will persist.

A more immediate consequence is that the U.S. Treasury’s coordinated intervention will face significant losses—the yen purchased with real money could sharply depreciate if the yen weakens again.

Koll concluded that although he is optimistic about Japan's economy, he acknowledged that "the yen is likely to weaken further," with risks still asymmetrically tilted toward additional yen depreciation.