Yen's Intervention buys time

Japan and the United States have carried out a coordinated yen-buying intervention for the first time in 28 years, as confidence in the yen had fallen to historic lows, with the currency briefly approaching 164 to the dollar in late July, its weakest level since 1986.

The previous coordinated yen-buying intervention took place during the Asian financial crisis, and the last time Japan and the U.S. acted together to sell yen was in the aftermath of the 2011 Tohoku earthquake. In other words, coordinated intervention has traditionally been reserved for times of crisis.

It's hard to claim that the global economy is currently in such a state of crisis. Instead, the intervention should be viewed as an effort to prevent excessive yen depreciation and its potential for broader disruption in global financial markets. In an interview published by Nikkei Asia, U.S. Treasury Secretary Scott Bessent revealed that one objective was to contain Asia currency risk. He said: "Many Asian currencies follow the Japanese yen currently. Korean won is weak because the yen is weak. Many people believe China has a very undervalued currency and they are reluctant to strengthen the currency too much just because of yen weakness."

Even so, intervention alone is unlikely to reverse the underlying trend of a weakening yen; at best, it only buys time. The U.S. government has sent a strong signal that it'll continue working with Japan to address the weak yen, but the root of the problem clearly lies within Japan.

Japan must first demonstrate greater fiscal discipline, but Prime Minister Sanae Takaichi's government is doing the opposite. It has shown no sign of abandoning its expansionary fiscal stance, and markets are becoming increasingly concerned about Japan's fiscal health.

The Bank of Japan, meanwhile, needs to dispel perceptions that it has fallen behind the curve on interest rate hikes. The next major focus for markets will almost certainly be the BOJ's policy meeting in September.

Another factor weighing on the yen is persistent real demand for dollars among Japanese companies, driven by higher global energy prices. The greater the volatility in currency markets, the more that speculators betting on further yen weakness is likely to have an influence.

Meanwhile, as the Japanese and U.S. governments move to defend the currency, the yen has once again weakened to 158 to the dollar. Toyota Motor, Japan's largest company by revenue, revised its assumed exchange rate for the fiscal year ending March 2027 from 150 yen to 160 yen per dollar, signaling expectations of a weaker yen.