Japan and the United States executed their first coordinated yen-purchasing operation since 1998 in late July, deploying billions of dollars to support the currency as it reached 40-year lows. Japan’s finance ministry had previously spent an estimated $74 billion in late April, followed by $59 billion on July 30 when the yen traded near ¥163.73 against the dollar. The U.S. Treasury Department, through the New York Federal Reserve, sold euros to purchase yen on behalf of the United States, working with Goldman Sachs and Morgan Stanley. This mechanism weakened the euro by more than 4% against the yen within days.
Despite the coordinated effort, the intervention’s effects proved temporary. By August 11, the yen had retreated to ¥159.28, erasing approximately half of the gains achieved through the intervention. Traders continued pricing in protection against additional intervention, with the possibility of further official action remaining on the table. Goldman Sachs estimated that Japan retained roughly $200 billion in available cash and cash-equivalent reserves, sufficient for a couple more intervention rounds at July’s scale.
Economists identified two structural economic factors that intervention cannot directly address. The U.S.-Japan interest rate differential remained significant, with U.S. rates at 3.5%-3.75% compared to Japan’s 1.0% despite recent Federal Reserve cuts and Bank of Japan rate increases. Additionally, Japan’s debt-to-GDP ratio exceeded 200%, while broad money supply growth of 2.2% annually fell well short of the approximately 6% pace economists consider necessary to achieve the BOJ’s 2% inflation target. Purchasing-power-parity analyses suggested the yen was substantially undervalued, with one strategist’s “Katsu Curry Index” implying fair value around ¥62 to the dollar.
Inflation data released following the intervention provided limited support for currency strength. July consumer prices rose 0.1% month-over-month and cooled to 3.4% annually, matching expectations, while producer prices came in flat against forecasts for a 0.2% increase. These relatively muted inflation readings reduced expectations for Federal Reserve tightening, with market participants pricing roughly 40% odds of a September rate increase, down from 54% a week prior. The interest rate differential that fuels carry-trade positioning against the yen remained wide enough to sustain downward pressure on the currency.
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