Yen intervention risk rises as BOJ hike odds jump to 76%

Japan's former top currency diplomat warned Thursday that yen intervention could recur at any time, as USD/JPY slid back to 159.50 and BOJ September hike odds jumped to 76 percent from 24 percent.

"It is probably not a matter of intervening specifically at, say, 160 or 162 yen per dollar. But intervention could take place again at any time, including coordinated action with the United States," Mitsuhiro Furusawa, former vice finance minister for international affairs and now president of Sumitomo Mitsui Banking Corp's Institute for Global Financial Affairs, told Reuters.

The coordinated Tokyo-Washington operation in late July drove the yen to 155.20 per dollar from a 40-year low of 163.99, but the currency has since surrendered roughly half those gains. Tokyo Tanshi data shows markets now assign a 76 percent probability to a September BOJ hike, up from 24 percent on July 30, after Treasury Secretary Scott Bessent urged Japan to back intervention with policy and fundamentals. The BOJ raised its policy rate to 1 percent in June, a 31-year high, after roughly twice-yearly hikes since exiting a decade-long stimulus program in 2024.

Furusawa estimated the BOJ ultimately wants rates between 1.5 percent and 1.75 percent, based on its neutral rate estimate of 1.1 percent to 2.5 percent. He projected the next hike after September would come in December or January, with another possible in fiscal 2027. If the BOJ delivers, narrowing US-Japan rate differentials could trigger further yen carry trade unwinding, with Goldman Sachs warning of spillover to global equities, bonds, and FX.

Furusawa, who retains close contact with incumbent policymakers in Tokyo and Washington, said the yen is "clearly too weak" at current levels and hurting the economy by boosting import costs. He said intervention alone only buys time, with faster BOJ rate hikes needed to reverse the currency's downtrend on a durable basis.

"Most market players believe the BOJ will raise rates in September and I think it should," he said, though what is more crucial is for the central bank to communicate the likelihood of a faster pace of hikes going forward.

Yen retraces half of intervention gains

The yen is heading for its biggest weekly loss in three months, falling about 1 percent this week to 159.43 per dollar. It has also weakened 0.8 percent to 183.91 per euro, the largest weekly drop since April. The currency was trading near 164 before July's intervention, and traders see the 160 level as a potential trigger for fresh official action.

The intervention playbook has evolved. Under the new framework, Japan can borrow dollars against its Treasury holdings using the US FIMA repo facility rather than selling them outright, a mechanism State Street Investment Management's Masahiko Loo described as "an almost bazooka-like backstop that forces markets to think twice before testing policymakers' resolve."

BOJ terminal rate seen at 1.5%-1.75%

Mizuho Securities is among brokerages that have moved up their base case for the next BOJ hike to September, pointing to a surprisingly hawkish tone in the July Summary of Opinions. Mizuho also raised its terminal rate forecast to 1.75 percent from 1.50 percent.

The yen faces continued headwinds from concerns about Japan's fiscal deficit and unfunded tax cuts under Prime Minister Sanae Takaichi, which put upward pressure on government bond yields and undercut the lasting impact of intervention, strategists at Mitsubishi UFJ Morgan Stanley Securities said.

With bond yields and swap rates already pricing in a September move, another delay by the central bank would be interpreted as "a betrayal of the market," said Rinto Maruyama, senior strategist for FX and rates at SMBC Nikko Securities.

The broader FX market has been relatively steady this week. The euro edged 0.2 percent lower to $1.1536 while sterling was flat at $1.3489. The Australian dollar hovered at $0.7060, and the New Zealand dollar bounced back after a surprisingly low inflation expectations reading, with swaps still pricing an 85 percent chance of a September hike. Overnight figures showing unchanged US producer prices in July supported dialing back bets on a September Fed hike, now seen as roughly a 35 percent chance.

Goldman Sachs strategist Karen Reichgott Fishman noted that USD/JPY has retraced about half of its initial post-intervention decline, with the macro backdrop offering less support for the yen than in summer 2024. If the BOJ accelerates tightening, the narrowing rate differential and higher funding costs for short-yen positions could keep the yen stronger for longer, with spillover effects across global markets.

Furusawa urged the Takaichi administration not to stand in the way of BOJ tightening and to follow through on fiscal sustainability pledges. "The ideal outcome would be to use monetary and fiscal policy to move away from a situation where the yen is excessively sold, while growth strategies begin to bear fruit and strengthen the Japanese economy," he said.

This article is for informational purposes only and does not constitute investment advice.