What the US-Japan Currency Intervention Means for the Yen, Rates, and the Dollar

**Allison Nathan** (0:05)
The United States and Japan have coordinated the largest currency market intervention in 15 years to help stabilize the yen. After more than five years of yen weakness, it's left investors asking the question, why now? I'm Alison Nathan and this is Goldman Sachs Exchanges.
To understand the why and the knock-on effects for currency markets, I'm sitting down with my colleague in Goldman Sachs Research, Karen Fishman and Praneet Shah, who leads foreign exchange options trading within our global banking and markets business. Praneet is joining me from London and Karen is here with me in the studio. Karen, Praneet, welcome to the program.

**Karen Fishman** (0:44)
Thanks for having me.

**Praneet Shah** (0:45)
Thanks, Alison.

**Allison Nathan** (0:46)
Karen, let's first level set for the generalist. Talk us through what happened and why this is a big deal.

**Karen Fishman** (0:53)
So on July 30th, Japan conducted or began its biggest intervention in the FX market in 15 years.
So they sold US dollars to buy Japanese yen in an effort to halt the weakening that we've seen over much of the past year, but especially over the past few months when the yen hit 40 year lows versus the US dollar. And this was a big deal for both its size and its scope. So in terms of the size, we won't have the official numbers for another month, but we can use indirect data to get a broad sense of how big it was. So things like inter-dealer trading volumes and BOJ data. And so there are a number of figures floating out there, but we've estimated over the first couple of days, so July 30th through July 31st, that it probably amounted to up to $85 billion, and maybe there was a bit more done on August 3rd as well, since volumes were elevated that day too. And so to put these numbers into context, that would be Japan's biggest two-day intervention in the FX market on record outside of October 2011, which was in the aftermath of the Fukushima disaster. And then in terms of the scope, it was also coordinated with the United States, as you mentioned. And this type of joint action hasn't been taken also since 2011, a week after the Fukushima disaster. And actually, I think it's worth noting that also that intervention was coordinated across the broader G7. So this is just the US and Japan, so maybe a little bit less significant from that perspective, but of course, the US's involvement is significant nonetheless.

**Allison Nathan** (2:31)
I want to dive into so much of that, but let's just take a step back for one moment. Why has the yen been so weak for people who don't follow it that closely?

**Karen Fishman** (2:38)
It's mainly a consequence of Japan's domestic policy mix. The government is pushing through big spending plans, and the Bank of Japan has been hiking interest rates only very gradually over the past couple of years. Markets view that combination as inflationary. So in other words, those rate hikes are insufficient to contain the rising inflation risk. And so if inflation is rising and rates aren't keeping up, real returns go down. And so investors move their money elsewhere or even bet against the yen, and so that's pushed the yen weaker. Now, it hasn't just been the domestic policy mix that's been weighing on the yen. It's also been a function of the broader macro backdrop. And really, despite all the volatility we've seen at periods throughout this year around AI, oil, and Fed expectation, we haven't really seen recession odds go up. And so you haven't really seen that demand for Safe Haven assets like the yen. And also, similarly strikingly, FX volatility has remained very low, and so that's a good environment for carry trades. So investors have been leaning into those, so buying higher yielding currencies and selling lower yielding currencies like the yen.

**Allison Nathan** (3:45)
But remind us why a weaker yen is something Japan doesn't want.

**Karen Fishman** (3:51)
So a weaker yen makes imports more expensive. So think higher prices at the grocery store, higher gas and electricity costs, more expensive overseas travel. All of these things weigh on households and businesses. Now, it also raises government borrowing costs, which is, I'm sure, a focus as well. And at the same time, though, it is beneficial for exporters and also tourists coming to Japan. But from a broader economy perspective, it raises the cost of living.

**Allison Nathan** (4:19)
So the case of Japan's interest in this intervention, I think, is pretty clear, as you just said. But why does the US want to be involved? What does it get from a stronger yen, a more stable yen?