The Yen Slides Back Toward 160 as Traders Test Tokyo's Willingness to Intervene Again

The yen traded around 159.4 per dollar on Friday and gained as much as 0.2 per cent to 159.15 during the session, trading further from the 160 level that traders watch as a threshold for intervention. It still lost about 1 per cent over the week. The Financial Times reports that the risk of disorderly moves is rising again after the joint operation, with speculative traders again building bets against the currency.

What makes this episode different from earlier yen defences is that Washington joined it. The Bank of Japan and the United States Treasury acted together in late July and early August in what participants described as an unusually large coordinated operation, a departure from a decade in which American officials mostly did not intervene, as the Official Monetary and Financial Institutions Forum (OMFIF) has documented.

Intervention addresses the immediate exchange-rate move, not its underlying cause. That cause is the interest-rate gap between a Federal Reserve holding policy tight enough to keep the dollar in demand and a Bank of Japan that has normalised policy only partially. Selling dollars from reserves changes the exchange rate for a few days. It does not change the interest-rate gap that makes it profitable to borrow yen cheaply and invest elsewhere, a trade known as the carry trade, which is why speculators returned once no follow-up operation appeared.

Markets are now pricing in the alternative. Traders are discussing a Bank of Japan rate increase in September or October, driven by concern that a weaker currency imports inflation through energy and food, a channel that a blocked Strait of Hormuz makes more expensive by the week.