Yen Under Pressure as USD/JPY Returns Near 160 Despite Rare Joint Intervention
Key Takeaways
- •Japan spent about $89 billion and the United States $5–10 billion in a rare coordinated intervention to support the yen between late July and early August.
- •The yen strengthened from 164 to 156 per dollar after the intervention but has since returned to trading near 160.
- •US inflation cooled in July, with CPI easing to 3.4% year over year, core CPI falling to 2.5%, and PPI coming in flat month over month against expectations of a 0.2% rise.
- •Gasoline remains above $4 a gallon and the US is set to impose 50% tariffs on some Canadian goods, pressures that could keep the Federal Reserve hawkish.
- •The US 30-year Treasury yield reached 5.216% at auction, its highest since 2001, as markets price in the risk that Japan may sell Treasuries to support its currency.
Japan and the United States carried out a rare coordinated currency intervention at the end of July and the beginning of August, spending approximately $89 billion and $5-$10 billion respectively to support the yen. The currency initially strengthened from 164 to 156 against the dollar, but two weeks later USD/JPY is back trading near 160.
The reversal reflects the intervention's failure to address the underlying problems, most notably the wide interest-rate gap between the United States and Japan. That differential continues to make the carry trade attractive, as investors borrow yen to purchase higher-yielding U.S. assets, leaving any relief from direct currency support vulnerable unless policy expectations also shift.
U.S. inflation has started to cool. According to the July CPI report, CPI eased to 3.4% year over year from 3.5% in June, while core CPI fell to 2.5% from 2.6%. PPI also came in below expectations, flat month over month versus the +0.2% expected, with annual growth slowing to 4.7% from 5.5%.
However, oil prices remain elevated. Gasoline is still above $4 a gallon, up more than 30% since the U.S. and Israel launched the war, raising the risk of another inflation wave and complicating the Fed's ability to signal an easier path too quickly.
Trade tensions are also returning. The U.S. is set to impose 50% tariffs on some Canadian goods on Wednesday, while commercial ties with India and China could deteriorate if Washington introduces tougher sanctions on Iran's trading partners.
Given these pressures, the Federal Reserve still has reasons to remain hawkish, even as markets bet on a softer policy path, with the probability of no policy change this year around 55%.
Should the Fed raise rates, the Bank of Japan may have no choice but to tighten as well. As for the chances of the BOJ acting without the Fed, this week's July Japanese inflation data will be crucial, with strong numbers potentially pushing JGB yields higher and giving the yen some support.
If even tighter monetary policy fails to halt the yen's slide — a decline that is already hurting households in Japan, which relies heavily on imported energy — the BOJ could be forced to sell Treasuries to raise cash and support the currency. Markets appear to be pricing in this risk, with the U.S. 30-year Treasury yield hitting 5.216% at auction, its highest level since 2001.
The analysis concludes that if Japan begins selling U.S. Treasuries, market volatility could rise sharply — a scenario most investors do not yet expect.
