Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / Why Japan's $74 Billion Yen Intervention Is Failing
Transcript
- Lucas: Japan spent $74 billion defending the yen in June. And the currency is still hovering around 162 per dollar. So the immediate question is — does intervention even work anymore? Luna: $74 billion in a single month is enormous. That's more than what they spent during the entire 2022 intervention campaign. Lucas: Right. Back in 2022, Japan spent about $60 billion over several months. This time they blew past that in four weeks. And it's done almost nothing — the yen is basically flat. Luna: So what's different this time? Why is the intervention failing? Lucas: The core issue is that the fundamental driver of yen weakness hasn't changed: the interest rate gap between Japan and the US is still massive. The Bank of Japan raised rates in March to zero to 0.1 percent — but the Fed is still at 5.25 to 5.5 percent. That's a gap of over 500 basis points. No amount of spot-market buying can overcome that carry trade incentive. Luna: And the carry trade is basically borrowing yen at near-zero rates and investing in higher-yielding dollar assets. As long as that gap exists, the pressure on the yen is structural. Lucas: Exactly. So the intervention is a tactical move, not a strategic one. It can smooth volatility, maybe slow the pace of depreciation, but it cannot reverse the trend. The market knows that. And what we saw in late June was that after each intervention round, the yen just crept back down within days. Luna: CNBC reported that investors say the real battle is with the Fed. If the Fed doesn't cut rates, Japan is fighting a losing battle. Lucas: That's exactly it. And look at the data — the trade-weighted dollar index is at 120.9, still extremely elevated. The dollar is strong against almost everything, not just the yen. So Japan is trying to hold back the tide. Luna: But they keep trying. Why? Is there any logic to burning $74 billion on something that's not working? Lucas: There is a logic, but it's more about signaling than exchange rates. Japan is a major US ally and a G7 economy. If Tokyo lets the yen collapse completely, it creates financial instability across Asia. Other central banks in Korea, Thailand, Indonesia — they all watch what Japan does. So a visible intervention signals that Japan will not let the market run away entirely. It's a backstop against panic. Luna: A 'we will not let this spiral' message. Lucas: Exactly. But there's a risk. If the market keeps testing them, Japan burns through reserves. They have about $1.2 trillion in foreign exchange reserves, so $74 billion is painful but not crippling. But if they have to do this every month for a year, that's nearly a trillion dollars. That's not sustainable. Luna: And for Japanese exporters, a weak yen is actually a benefit. Toyota, Nintendo, Sony — they all report in yen, so a weaker yen boosts their overseas earnings when converted back. So why would Japan want a strong yen? Lucas: That's the paradox. Many large Japanese corporations benefit from a weak yen. But the problem is for consumers and for smaller domestic businesses. Japan imports almost all its energy — oil, natural gas, coal. With the yen weak, energy costs soar. Food imports are more expensive. Tourism is great for visitors, but Japanese households feel the pinch at the grocery store and at the gas pump. So the Bank of Japan is caught between supporting exporters and protecting domestic purchasing power. Luna: And then there's the carry trade unwind risk. If the yen suddenly strengthens — say the Fed cuts rates unexpectedly — that $74 billion in intervention might actually make things worse. Because all those carry trades would reverse sharply. Lucas: Right. There's a volatility risk on both sides. The Bank of Japan doesn't want a slow bleed, but they also don't want a sudden spike. So they're trying to manage expectations. The real question is whether the Fed cooperates. If the US starts cutting rates later this year, the pressure on the yen eases naturally. If not, Japan might have to accept a yen at 170 or even higher. Luna: And that would have big implications for global trade flows, especially for countries that compete with Japan in export markets. Lucas: Exactly. South Korea, for example — the won has also weakened, but not as much as the yen. So Korean exporters like Samsung and Hyundai lose competitiveness relative to Japanese rivals. The same for Chinese exporters. So the yen's weakness ripples through Asia. It's not just a Japan story. Luna: Speaking of conversations like these — if you find these deep dives into global macro useful for your work or your investing, there's a simple way to keep the show ad-free. You can support us at buy me a coffee dot com slash fexingo. That's it — no pressure, just a way to keep the episodes independent. Lucas: Yeah, and it genuinely helps. The show has zero ads, no sponsors to answer to, and listener support is what makes that possible. So if it's added value for you, consider it. Alright — back to the yen. Lucas: Let's talk about what Japan could do differently. One option is to coordinate with the US Treasury, maybe get a joint statement or even coordinated intervention. In the past, the US and Japan have worked together on currency issues. But right now, the US benefits from a strong dollar — it helps contain import inflation and keeps Treasury yields attractive. So the US has little incentive to help Japan weaken the dollar. Luna: And the G7 communiqué always says 'excessive volatility is undesirable' but never actually names Japan. Lucas: Right. So Japan is largely on its own. Another option is for the Bank of Japan to hike rates more aggressively. If they raise rates to 0.5 percent or even 1 percent, that would narrow the rate gap and could attract some yen buying. But that would also hurt Japan's economy — they've struggled with deflation for decades, and higher rates could choke off the fragile recovery. Luna: So they're stuck. Intervene and burn reserves, hike and hurt growth, or do nothing and let the yen slide. Lucas: That's the trilemma. And what we're seeing in the data is that the market is betting on option three — letting it slide. The yen is at 161.7 as of this morning, flat week over week. The intervention created a brief spike, but it faded quickly. The trend is still down. Luna: For hedge funds and speculators, this is a one-way bet. They can keep shorting the yen because the carry is positive and the central bank's capacity to push back is limited. Lucas: Exactly. And the positioning data shows that speculative shorts are near record highs. They're not scared of the Bank of Japan anymore. They've seen that the intervention bumps are buying opportunities to add more shorts. Luna: So what changes the narrative? What would actually turn the yen around? Lucas: Three things. One: a Fed pivot — rate cuts that narrow the interest rate gap. Two: a surprise hawkish move from the Bank of Japan — a rate hike paired with a reduction in bond buying. Or three: a global risk-off event that triggers a rush to safe havens. The yen is still a safe haven, so a financial shock could strengthen it quickly. Luna: And none of those seem imminent. The Fed is on hold, the Bank of Japan is cautious, and markets are relatively calm. Lucas: Right. So the most likely scenario is more of the same: a weak yen, periodic interventions, and a grinding depreciation. For investors, that means thinking about yen exposure in portfolios. Japanese equities might benefit from a weak yen, but unhedged yen bonds are getting crushed. And for multinationals, the strong dollar continues to squeeze earnings from Japan. Luna: It's a reminder that currency intervention, no matter how big, can't override the fundamentals. Lucas: Precisely. $74 billion is a lot of money. But against a multi trillion dollar forex market, it's a drop in the bucket. The real battle is between two central banks — one in Tokyo and one in Washington — and so far, the Fed is winning.