The yen held on to most of its intervention-driven gains on Tuesday, maintaining strength after last week's joint action by Tokyo and Washington to shore up the currency. According to Reuters, the Japanese currency was down 0.38% at 157.79 per dollar, having touched a three-month high of 155.20 in the previous session, though it remained well above its 40-year low of 163.99 touched in July. Japanese currency had surged as much as 5% over the last three trading sessions, with Japan confirming coordinated yen-buying intervention on Friday with the United States in a rare move. Tomo Kinoshita, global market strategist for Japan at Invesco, noted that "I expect concerns about the possibility of further intervention by Japanese and U.S. authorities (to) constrain downside pressure on the yen in the near term." The yen's resilience reflects speculator caution about rebuilding bearish positions after the intervention.
Attention is now shifting to the BOJ's next policy move following the coordinated intervention, with expectations growing for potential rate increases. According to Reuters, the central bank warned for the first time that underlying inflation could exceed its target and indicated future policy discussions would focus more heavily on upside inflation risks. Reuters reported that the guidance has strengthened expectations for a possible interest rate increase as early as September, with many analysts arguing that a sustained yen recovery will require the BOJ to reinforce the intervention with faster policy normalization rather than relying solely on currency market operations. HSBC economists believe a surprise BOJ rate increase would significantly strengthen market confidence that the central bank is committed to tightening policy, noting that coordinated intervention alone may have only a temporary effect unless accompanied by monetary policy adjustments.
The joint intervention drove the yen from nearly 164 against the dollar last month to around 155.20 on Monday before settling near 157.79, representing one of the most significant currency operations in recent history. According to Reuters, Japan may have spent as much as $36.58 billion buying yen during Friday's operation, with the US Treasury reportedly buying yen for euros instead of selling dollars, a highly unusual move likely aimed at helping Japan strengthen the yen without encouraging a view that Washington wants a softer dollar. This was the first coordinated US-Japan currency intervention since the aftermath of Japan's devastating earthquake and tsunami in 2011, and the first joint attempt in almost three decades to strengthen, rather than weaken, the yen. Japanese finance minister Satsuki Katayama confirmed that Tokyo had bought yen in coordination with the US Treasury Department, stating "We will not hesitate to conduct further joint intervention." President Trump described the decision as help for an important ally, calling it "a signal of friendship" and noting the US received "a financial benefit" from the operation.
US Treasury Secretary Scott Bessent has openly expressed concern over excessive yen weakness, reinforcing the credibility of the coordinated action and signaling stronger institutional support behind Japan's intervention efforts. According to Reuters, Bessent also indicated that the United States could expand the Federal Reserve's Foreign and International Monetary Authorities (FIMA) repo facility in the coming months, increasing temporary dollar liquidity available to foreign central banks. Portfolio managers cited by Reuters said an expanded FIMA facility could substantially increase Japan's capacity to intervene in currency markets, potentially allowing dozens of additional intervention rounds if required. Nomura estimates Japan could deploy as much as 30 trillion yen in further intervention, with authorities potentially defending levels around 154 yen per dollar to discourage momentum-driven selling. The latest intervention comes after Japan spent about $70 billion in late April and early May defending the currency, with those earlier efforts producing only temporary gains.
Market data showed investors had accumulated net short yen positions worth roughly $12.5 billion, highlighting the scale of speculative betting against the Japanese currency. According to Reuters, the yen has remained under pressure amid elevated U.S. interest rates, volatile oil prices linked to the Iran conflict, and large speculative positions against the Japanese currency. TS Lombard analysts led by Daniel Von Ahlen noted that "yen short positioning are still relatively elevated but are now particularly risky given risk of intervention by Japanese and U.S. monetary authorities." Against the euro, the yen slipped 0.62% to 181.94, down from Monday's almost nine-month high of 179.435. Axel Merk, chief investment officer at Merk Investments, explained that "The joint action by Japan and the U.S. appears to be signalling to the market not to short the yen," adding that "As most people would agree that interventions in the currency markets have a limited impact in the medium term. So I think it's about signalling and posturing to tell the market, 'Hey! Don't short the yen so much!'" However, BNP Paribas analysts noted that "the underlying outlook of the yen has not changed," stating they are "not yet convinced" that the pair will end the year higher than current levels despite the intervention's impact.
The dollar index eased 0.13% at 99.88, recovering after recent yen gains that followed the intervention. According to Reuters, the euro was up 0.20% against the greenback at $1.1531, having hit a 1-1/2-month peak of $1.1559 in the previous session. Sterling strengthened 0.13% to $1.3451, while against the Swiss franc, the dollar weakened 0.14% to 0.8092. The dollar came under pressure after the Federal Reserve held interest rates steady last week, with its losses accelerating following the yen intervention. Joseph Capurso, a strategist at Commonwealth Bank of Australia, said "We consider market participants overreacted by selling the USD in response to the Fed's decision to keep the funds rate unchanged. U.S. interest rates are going to be increased, but not on the markets' short timeframe." Markets are currently pricing in roughly 35 basis points worth of Fed rate hikes by December, with the focus turning to Friday's jobs report.
