US and Japan's joint intervention only lasted one day? Ueda Kazuo’s hawkish remarks fail to reassure the market as yen's rebound loses steam and returns to the 160 level

According to Zhitong Finance APP, the yen stalled on Friday after an intervention-driven rebound, fluctuating between gains and losses after the Bank of Japan kept rates unchanged and Governor Kazuo Ueda provided little new support for the yen.

The yen had reversed its losses against the US dollar, strengthening at one point to 158.55 after previously weakening to 160.88. All 52 economists surveyed had anticipated the Bank of Japan’s rate decision. The vote was 8 in favor and 1 against, with committee member Hajime Takata calling for consecutive rate hikes.

At the post-meeting briefing, Ueda took a somewhat hawkish tone, leaving the door open to a rate hike at upcoming meetings, but did not indicate it was likely to happen soon. He emphasized that he sees greater upside risks to the price outlook, and that with inflation trends now very close to the central bank’s 2% target, any upside surprise in prices will come at a higher cost.

JPMorgan strategist Ikue Saito said, “A sustained and notable rise in the yen would require an even more hawkish stance,” and, “We expect the USD/JPY to gradually recover and regain last night’s losses.”

During Thursday’s New York trading session, the yen surged as much as 3.3% against the US dollar, posting its largest intraday gain since December 2023, before pulling back. According to a market participant familiar with the matter, Japan intervened to support the yen, and US authorities conducted a rate check around 2:30 am Tokyo time.

Rinto Maruyama, Senior FX and Rates Strategist at SMBC Nikko Securities, said, “By intervening before the Bank of Japan’s monetary policy meeting, authorities may have sought to maximize the impact and catch the market off guard, in stark contrast to the more transparent and easily identifiable interventions in April.” Maruyama added that the sharp rise in long-term bond yields in both Japan and the US was “a key factor behind Japan’s FX intervention and US rate check operations.”

Sources familiar with the matter said earlier this month that officials were willing to hike rates faster than economists' consensus, as the yen’s prolonged weakness increased the risk of inflation overshooting. Overnight index swaps show about an 88% chance of a rate hike by October.

Strategist Andre de Silva said that despite hawkish rhetoric, Bank of Japan Governor Ueda’s press conference provided little evidence that the central bank is prepared to accelerate its policy normalization timetable. This leaves the yen lacking the necessary policy catalyst to turn the intervention-driven rally into a broader reversal of trend.

Finance Minister Mitsuru Kitayama said she could not answer questions about whether foreign exchange intervention had occurred. She reiterated that authorities stand ready to respond at any time with a sense of urgency. A US Treasury spokesperson did not respond to requests for comment.

US involvement increased the significance of the intervention and could make traders more cautious. US Treasury Secretary Wally Adeyemo said in an interview that he believes the yen is “significantly undervalued,” and that “excessive volatility” is unhealthy. Japan’s top currency official Atsushi Mimura said Friday that Japan is receiving support from the US beyond moral encouragement.

Japanese media earlier reported that Japan had intervened, and that US authorities had conducted rate checks on the USD/JPY pair. After touching 157.98 on Thursday, the yen weakened in early Tokyo trade to 160.75. Over the past 12 months, the yen has still fallen about 6% against the US dollar, making it the worst performer among G10 currencies.

Multiple Yen Interventions in Japanese Forex Market

The yen, which has fallen to 40-year lows in recent months, has been under relentless pressure from rising oil prices, persistent budget deficits, and wide interest rate differentials. Despite Japanese authorities spending a record 11.73 trillion yen ($73.1 billion) in the open market buying yen last quarter, the currency still plunged.

Based on Ministry of Finance reserve data, Japan may have used its holdings of foreign securities (including US Treasuries) to fund the intervention.

Japan’s unprecedented intervention spending not only highlights the stakes for the country, but also underscores the difficulty of resisting the tide in a global FX market with $9.5 trillion in daily volume.

After refraining from intervention for 25 years, Japan returned to the market in 2022 to support the yen, then intervened again in 2024 when authorities attempted to slow the pace of yen depreciation against the dollar. As central banks around the world sharply raised rates amid post-pandemic inflation, while the Bank of Japan kept its own policy rate negative to stimulate Japanese economic growth, the yen’s decline began in earnest.

Despite the Federal Reserve keeping rates unchanged this week, traders still expect US borrowing costs to rise later this year—which leaves the interest rate gap between the US and Japan at a disadvantageous width for the yen.