A record-breaking joint US-Japan currency intervention, totaling approximately $87 billion, has failed to reverse the yen's weakness and instead provided carry traders with an opportunity to rebuild short positions at higher levels. The persistent interest rate gap makes any effort to support the yen a potential new entry point for speculators.
The intervention, executed in late July, only yielded a temporary rebound in the yen's value. Market observers, including JPMorgan Private Bank and State Street Bank & Trust, note that while hedge funds had halved their yen short positions by August 4, some investors have already begun returning to yen-funded carry trades. The yen has now retraced half of the gains from the intervention, approaching the 160 level.
As the yen weakens again, the government led by Takashi Sanae is supporting the Bank of Japan's potential rate hike in September or October. Overnight index swaps indicate traders have priced in a 25-basis-point rate hike by the BOJ before October. However, with Japan's policy rate at just 1%, still well below those of most developed economies, the wide interest rate gap remains unchanged, and the allure of carry trades is difficult to diminish.
The scale of the intervention underscores its limitations: an estimated $53 billion on July 30 (potentially the largest single-day intervention on record) and approximately $34 billion on July 31. Carry funds show the most interest in the Australian dollar, followed by the euro, US dollar, Canadian dollar, and British pound, which together form the main counterparts in yen-funded carry trades.
Intervention Becomes a Shorting Opportunity for Carry Traders
Ashwin Binwani, founder of Alpha Binwani Capital, bought the USD/JPY pair around 157, betting on a weaker yen. The pair has since risen to 159.27. "The intervention was a fantastic opportunity to sell the yen at higher levels," Binwani noted. "We are not afraid of government actions. The returns from carry trades are too attractive to miss."
After hedge funds halved their yen short positions by August 4, some capital has begun to return. Damien Loh, chief investment officer at Ericsenz Capital, also re-entered a long USD/JPY position around 157 after the previous intervention. Besides the positive carry, this position helps hedge against other US dollar shorts in his portfolio. However, the act of rebuilding short positions itself increases the probability of further government intervention.
Government Backs Autumn Rate Hike, But Yield Gap Remains Unchanged
Reports indicate that the Takashi Sanae government supports the BOJ's recent moves toward tightening, with the next possible action in September or October. While overnight index swaps show traders have priced in a 25-basis-point rate hike by the BOJ before October, this is insufficient to significantly narrow the yield gap with the US.
Japan's 1% policy rate is below that of most developed economies, and fiscal concerns are further pressuring the yen. In the bond market, the yield on the 10-year Japanese government bond has risen to 2.883%, a nearly 30-year high, while the 40-year yield has climbed to 4.055%. The spread between the 10-year and 2-year JGB yields has widened to 1.4 percentage points. George Efstathopoulos, a portfolio manager at Fidelity International, stated: "As long as the BOJ remains behind the curve, yen-funded carry trades will continue to thrive."
Australian Dollar and Euro Lead as Primary Counterparts, Forward Market Sounds Alarm
Bart Wakabayashi, a Tokyo branch manager at State Street Bank & Trust, reports that the bank's proprietary data shows real-money accounts are maintaining carry positions, selling the yen against a basket of G10 currencies. The most interest is in the Australian dollar, followed by the euro, US dollar, Canadian dollar, and British pound. During the joint intervention in late July, the US Treasury coordinated by selling euros and buying yen.
The rise in the one-year yen forward is causing concern in Tokyo, as this trend is typically associated with direct US dollar buying, with traders using the post-intervention rebound to reload carry positions. This year, shorting the yen against the Colombian peso, Turkish lira, and Norwegian krone has yielded returns exceeding 10%. Yuxuan Tang, head of Asia interest rate and FX strategy at JPMorgan Private Bank, stated, "Unless there is a clear decline in the US dollar and US Treasury yields, carry traders may push USD/JPY to retest 162." He added that the market recognizes that repeated interventions are becoming increasingly costly for Japan.
US Treasury Secretary Janet Yellen reiterated support for a stable yen, warning that yen weakness could trigger broader devaluations in Asia and stating that Washington would "do whatever it takes" to support Japan. The BOJ's policy meetings in September or October, along with the potential for further government intervention, will be key factors determining the direction of carry trades and the yen exchange rate.
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