Japan has the firepower to continue yen intervention efforts: Goldman

Goldman Sachs says Japan has enough funds at its disposal to buy the yen several more times on the scale of last month’s historic intervention, aided in part by access to Federal Reserve facilities.

Of Japan’s roughly $1 trillion in U.S. dollar reserves, Goldman estimated that about $200 billion, perhaps the size of July’s operation, exists in cash or cash equivalents.

“They already have enough money at their disposal to do a few more rounds of what we just saw,” Karen Fishman, a strategist at Goldman Sachs Research, said on the bank’s “Exchanges” podcast late Wednesday, calling it near record size.

“Realistically, they’re probably not going to be able to use all of it, but I think there’s a sense that they have enough capacity to continue to intervene if they want to,” Fishman said. He added that the full amount could theoretically be made available in the form of liquidity if they had access to the Fed’s facilities.

Japanese officials said they would not hesitate to intervene if necessary. Fishman said this has “some credibility” now that the US has stepped in alongside Japan to support the yen for the first time since 1998. The two countries also acted in conjunction with other G7 countries to curb the yen’s appreciation after the 2011 earthquake.

The joint action in late July came after the yen had fallen toward 164 yen to the dollar, hovering near a 40-year low, and the Bank of Japan’s September policy meeting is central to whether the reprieve remains in place.

Wall Street banks estimated that Tokyo pumped in as much as $85 billion in the first two days of operations last month, saying it was Japan’s largest two-day foray into the foreign exchange market on record, apart from October 2011, when Tokyo intervened in the aftermath of the Fukushima disaster.

of circle After the intervention, the price rose above the 200-day moving average of $1 to $158. But these gains are now fading. On Wednesday, the currency fell near the key 160 level, regaining about half of its intervention strength.

The intervention “is not a sustainable solution and ultimately just buys time,” Fishman said, noting that after Japan’s unilateral actions in April and May, the yen returned to a 40-year low within months.

Japan’s Ministry of Finance has announced that it plans to use the Fed’s FIMA repo facility, which allows the central bank to raise dollar cash against Treasury holdings, avoiding the Japanese government dumping government bonds on the secondary market to fund interventions.

The prospect of a much larger war chest is already changing sentiment. Praneet Shah, head of foreign exchange options trading at Goldman, said on a podcast that clients “actually became quite bullish on the yen” last week after the Fed’s facility potentially put the entire $1 trillion in range for intervention.

Looking at options pricing, traders are still bracing for a sharp rise in the yen, and that fear itself could prevent new selling. Shah said the rise in short-term call premiums for the yen shows the market is still wary of sudden gap movements, and investors are becoming wary of betting against the yen as it slides back toward 160 yen.

“If spot prices are rising to 160 yen, there is a real risk that you don’t want to continue selling the yen when the market still has a large risk of a drawdown priced in,” he said.

Whether Tokyo pulls the trigger again could depend on the carry differential between Japan and U.S. borrowing rates, which remains the overwhelming driver of exchange rates, Shah said.

With the 10-year U.S. Treasury yield at 4.690% and the 10-year Japanese Treasury yield at 2.839% late Wednesday, investors still have a big incentive to hold U.S. Treasuries.

On the Japanese side, markets are currently pricing in a 65% chance that the Bank of Japan will raise interest rates by 25 basis points in September and tighten by about 40 basis points by the end of the year. Fishman said that if the September interest rate hike “does not happen, it will put new downward pressure on the yen.”

Shah said the Bank of Japan would need to raise interest rates faster than expected to change the carry dynamics that have led to the yen’s 45% depreciation over five years.

On the U.S. side, Shah said the weakening economic data could weaken the case for further interest rate hikes by the Federal Reserve, which could ease pressure on the yen as bets on further intervention rise again.

Shah pointed out that in July 2024, one of the most effective rounds of Bank of Japan and Treasury intervention was hit by the US CPI failure, which was followed days later by an even worse payroll failure.

“Even if it fails, the market will really start to build expectations for further intervention later this week,” he said.

Wednesday’s inflation report was in line with expectations. The consumer price index rose a seasonally adjusted 0.1% in July, in line with consensus expectations, but the annual rate slowed to 3.4% from 3.5% in June. After the announcement, government bond yields fell.