JPY intervention: what makes it so important this time?

What happened?

Talk of official involvement by policymakers to stop the persistent weakening of the Japanese yen (JPY) against the US dollar first emerged after the Bank of Japan’s (BOJ’s) policy meeting on 23 January. At that time, heavy trading prompted speculation that Japanese authorities were stepping in to stabilise the currency after it briefly crossed the 159 threshold, a level that had previously triggered intervention. Since then, the USD/JPY exchange rate has declined meaningfully from its recent highs. While not confirmed, this potential intervention may be different from previous operations conducted by Japan’s Ministry of Finance because of the probable involvement of the US authorities.

Why does it matter?

Rumours of coordinated intervention by Japan and the US intensified following reports that a “rate check” had been requested by the US Treasury. The New York Federal Reserve was said to have contacted banks to inquire about US dollar/yen levels and positioning. While no authorities have formally confirmed intervention, the absence of clarification, especially from the US Federal Reserve (Fed) and Japan’s Ministry of Finance, increases the likelihood of a joint operation between the US and Japan. 

This development raises the possibility that the move is as much about the US’s policy priorities as it is about Japan’s. Markets may therefore need to assign a higher probability that this marks the early stages of a more explicit weaker-dollar policy stance. Combined with renewed tariff threats towards allies and continued concerns about the deterioration of the US institutional framework, it could prove to be another driver of accelerating diversification away from US assets. If so, this verbal USD/JPY “rate check” could ultimately prove more inflationary for the US than it is disinflationary for Japan.

At the same time, based on US Treasury Secretary Scott Bessent’s past comments, it seems unlikely that the US would float the prospect of intervention without assurances that Japan is prepared to tackle the fundamental drivers of yen weakness. Intervention, or the threat of it, as may have been the case here, can move markets in the short term, as recent price action shows. But for any sustained shift to occur, Japan’s underlying policy stance must change. The Japanese yield curve is currently one of the steepest in the world, suggesting that while global investors may believe the reflation story longer term, they remain cautious on the likelihood of significant near-term hikes.

What are the key implications?

Yet, in our opinion, this development has made a near-term hike in Japanese rates more, not less, likely. Intervention can slow FX moves in the near term, but for any yen strength to be durable, the underlying cause — the, in our view, still-inappropriate policy stance — must be addressed and markets need to take note.

Moreover, a coordinated intervention of this nature requires a high degree of international policy coordination and significant levels of trust, both of which are in short supply in today’s tense geopolitical environment. We believe this episode strengthens the case for a rate rise at the BOJ’s next policy meeting, in April. While political risk and potential global risk-off conditions could argue against full pricing, an April hike would likely signal a faster hiking cycle, rather than a one-off move. We now expect up to three hikes this year.

At the same time, we remain confident that the Japanese reflation theme will stay intact. The yen’s recent depreciation may modestly reduce near-term imported inflation, but the impact on the BOJ’s medium-term inflation outlook is small, since:

• Japanese inflation is now driven more by domestic factors than by trade or foreign exchange-related considerations.
• The BOJ’s forecasts are based on a six-week moving average rate, so the deviation versus the assumptions it uses is limited.
• We expect inflation to again exceed 2% by early autumn.

In addition, currency weakness has become a net drag on growth, curtailing real income and consumption more than it has boosted net exports. As such, the recent currency weakness does little to undermine the BOJ’s growth or inflation narrative. Coupled with still highly supportive financial conditions, we believe this further bolsters the case for meaningful policy tightening.

Arguably, the more significant development is the US Treasury’s involvement. It is extremely unusual for US policymakers to intervene in foreign markets and suggests a shift to a more activist approach. This implies that the episode is as much about the dollar as it is about the yen. Markets will need to assign a higher likelihood to:

1. a more explicit weaker-dollar policy; and
2. accelerating diversification out of US assets, especially if combined with renewed tariff threats and fiscal uncertainty (including the potential for prolonged government shutdowns).

If those dynamics take hold, this episode could prove more inflationary for the US than disinflationary for Japan, through a weaker US dollar, higher import prices and upward pressure on US term premia. In that scenario, US long-end yields would be at risk of drifting higher, even as growth uncertainty persists.

What does it mean for investors?

• Accelerating policy “normalisation” — This latest development may turn out to be another milestone in Japan’s journey away from deflation. It strengthens our conviction that Japan is moving closer to abandoning its still-inappropriate policy stance, with significant implications for both rates and the currency. Notwithstanding potential political pressure, we think that BOJ hikes will come faster than the market expects given a positive outlook for Japan’s economy and growing evidence that we are firmly out of deflation.
• Potential for sustained dollar weakness — We have long held the belief that the greenback is structurally overvalued and entering a period of sustained weakness, driven by declining US institutional credibility, supportive fiscal dynamics and competitive investment opportunities abroad. This potential intervention and some of the subsequent comments from the US administration suggest a willingness to tolerate or even encourage a lower dollar. If true, it would also have implications for US inflation and rates. However, we would caution against easy conclusions. The dollar could benefit from the possibility that markets may have overestimated the pace of Fed easing. Furthermore, we see continued capital inflows into the US technology sector amid the ongoing AI boom.
• Risk of further adjustment in Japanese rates — For a long time, we believed that Japanese interest rates should increase to reflect higher and more persistent inflation. While the sell-off in Japanese government bonds that we’ve seen over the past year may be slowing at the long end of the curve, the risk of further abrupt adjustments in the rates market is likely to persist until the BOJ convincingly addresses the policy mismatch between still ultra-low interest rates and increasingly sticky inflation.