The key takeaway for positioning is that Japan’s firepower is not the constraint, capacity is described as ample, so the real variable is timing and trigger rather than ability to act. Goldman’s framing puts two catalysts on watch: a miss on US data that weakens the case for further Fed tightening, which would narrow the carry differential and take pressure off the yen organically, or a BOJ failure to deliver the roughly 65% priced September hike, which would do the opposite and likely reopen the case for direct intervention. The reference to July 2024, when a CPI miss followed by a payrolls miss coincided with one of the most effective intervention rounds, suggests Tokyo and Washington see soft US data prints as the moments when intervention gets the most bang for its buck, rather than acting reactively at any point the yen weakens. With Wednesday’s CPI landing in line rather than as a miss, that particular trigger did not fire this week, leaving the September BOJ decision as the more immediate swing factor.
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Goldman says Japan has plenty of ammunition left for another yen intervention, but the real question is whether a US data miss or a BOJ pass in September gives Tokyo the opening to use it. Via CNBC.
Summary:
- Goldman Sachs estimates Japan has enough capacity for a couple more rounds of yen buying on the scale of last month’s intervention, of Japan’s roughly $1 trillion in dollar reserves, about $200 billion sits in cash or cash equivalents
- Access to a Federal Reserve facility could theoretically make the full $1 trillion available in liquid form, Goldman strategist Karen Fishman said
- Goldman estimates Tokyo deployed as much as $85 billion in the first two days of July’s intervention, the largest two-day yen operation on record outside the aftermath of the 2011 Fukushima disaster
- The yen has already given back around half its intervention-driven gains, slipping back toward the 160 level after strengthening past its 200-day moving average near 158
- Markets currently price around a 65% chance of a 25 basis point BOJ hike in September and about 40 basis points of tightening by year end
- Goldman said a BOJ failure to deliver a September hike would put renewed downward pressure on the yen
- On the US side, a miss on economic data could ease pressure on the yen by weakening the case for further Fed hikes, and Goldman’s Praneet Shah said such misses have historically been the moments markets most expect a fresh intervention, pointing to July 2024’s CPI and payrolls misses as an example
- Wednesday’s July CPI report came in line with expectations, with headline inflation easing to 3.4% from 3.5%, and Treasury yields pulled back after the release
- The yield gap remains wide, with the 10-year US Treasury near 4.69% against around 2.84% for 10-year Japanese government bonds
Japan has more than enough financial capacity to intervene in currency markets again should it choose to, according to Goldman Sachs, which said the real determinant of whether Tokyo pulls the trigger a second time is less about resources and more about the carry differential between Japanese and US interest rates, and the specific data or policy surprises that could shift it.
Of Japan’s roughly $1 trillion in US dollar reserves, about $200 billion sits in cash or cash equivalents, an amount Goldman strategist Karen Fishman said on the bank’s Exchanges podcast is likely close to the size of July’s operation. “They already have at their disposal enough to do another couple rounds of what we just saw,” Fishman said, adding that access to a Federal Reserve facility would theoretically make Japan’s full trillion-dollar reserve position available in liquid form if needed. Goldman estimates Tokyo deployed as much as $85 billion in the first two days of last month’s intervention, marking Japan’s largest two-day foray into currency markets on record outside the aftermath of the 2011 Fukushima disaster.
Those gains have proven difficult to hold. The yen strengthened past its 200-day moving average near 158 per dollar following the July intervention, but has since given back roughly half that move, slipping toward the 160 level this week. Fishman described the intervention as “not a sustainable fix,” noting that after Japan’s earlier solo intervention in April and May, the currency was back at 40-year lows within months.
Goldman pointed to two specific developments most likely to determine Tokyo’s next move. On the Japanese side, markets currently price around a 65% probability of a 25 basis point BOJ hike in September and roughly 40 basis points of tightening by year end. Should the central bank fail to deliver that hike, Fishman said it would put renewed downward pressure on the yen, potentially forcing Tokyo’s hand. On the US side, Goldman’s Praneet Shah said cooler-than-expected American economic data could ease pressure on the yen organically by weakening the case for further Federal Reserve tightening, and that such data misses have historically been the moments markets most anticipate a fresh round of intervention. Shah cited July 2024 as an example, when one of the most effective BOJ-MOF interventions coincided with a US CPI miss compounded by a weaker payrolls report days later. Wednesday’s July CPI print, by contrast, came in exactly in line with expectations, with the annual rate easing to 3.4% from 3.5% and Treasury yields pulling back modestly on the release, meaning that particular trigger did not fire this week.
The underlying carry dynamic remains the dominant driver regardless of any single data point. The 10-year US Treasury yield stood near 4.69% late Wednesday against roughly 2.84% for its Japanese counterpart, a gap Shah said the BOJ would need to close through faster-than-expected hikes to meaningfully shift the trend behind a 45% yen depreciation over five years. Options markets are already pricing in the possibility of another sharp yen move, with elevated premiums on short-dated yen calls suggesting traders remain wary of positioning against the currency even as it drifts back toward 160.
This article was written by Eamonn Sheridan at investinglive.com.