A tale of two interventions

JPY has climbed back 5% against the Dollar since the last week of July entirely off the back of two interventions, the total cost of which is likely in excess of $100bln. Of course, this 5% gain pales in comparison to the 41% weakening seen in JPYUSD over the past 5 years and the only long term answer the Japanese authorities have is to raise interest rates at a much more aggressive pace.

Hajime Takata, a member of the policy board for the BoJ said as much yesterday when he suggested that the Bank move more quickly to raise rates and floated the idea of back-to-back hikes to the Japanese base rate. Naturally, the underappreciated risk may well be the further endangerment of carry trade that is estimated to provide in excess of $250bln in liquidity per annum.

A rapid rise in Japanese rates, which remains just a suggestion, could produce very sharp movements across the FX markets, with the most likely reaction being a significant risk-off rally into sovereign debt and USD. Moreover, such a safe haven rally could well produce an unvirtuous cycle of strengthening the Yen further, which further harms the JPY carry trade.

Even if the buybacks top the $4bln expected on that date however, within a $40trln market of Treasuries and a very stacked environment of corporate issuances, Bessent’s attempts to lower yields may be tears in rain.