SerpApi.Org
U.S. stocks faced a fresh risk Wednesday as a key component of the years-long rally was threatened by officials in Japan.
The Japanese yen slumped to its lowest levels in 40 years this week, and hit a fresh trough of 163.24 against the U.S. dollar, before rebounding to 163 on news suggesting the Bank of Japan is open to further and faster rate hikes following its June move to take its key lending benchmark to the highest levels in three decades.
Finance Minister Satsuki Katayama, meanwhile, warned Wednesday that the government will take “decisive action” to stem the yen’s decline, echoing comments from Chief Cabinet Secretary Minoru Kihara’s assessment that yen purchases could come “at any time.”
That level of verbal intervention, however, failed to deliver consistent support for the currency.
Chris Turner, global head of markets at ING, thinks the yen could “grind towards the 164/165 area into next week ahead of the BoJ policy meeting on July 31.”
That level is crucial for a host of reasons, but for U.S. investors the interest largely lies in the fact that a weaker yen, and low interest rates from the Bank of Japan, have supported the so-called ‘carry trade’ that has provided key support for U.S. stocks.
In that setup, investors borrow cheaply in Japan, convert the yen to dollars, and put that cash to work in other markets around the world. Data from the Bank for International Settlements suggests $1.3 trillion and $1.7 trillion is deployed as a result.
But that also exposes those investors to massive risks if the yen were to appreciate quickly, as during a government-led intervention in the summer of 2024 that spent $36 billion to drive the currency nearly 3% higher in July.
That move stoked not only the biggest single-day decline for Japanese stocks since 1987, but also a spike in U.S. market volatility, with the S&P 500 falling 6.1% over a three-day period. And with markets on edge heading into the teeth of the second quarter earnings season, a similar effort could have a dramatic effect.
Not all efforts to support the yen have worked, however, nor had a similar impact on U.S. stocks.
Japan has spent around $74 billion in currency interventions this year, spread over multiple dates in the spring, the largest quarterly tally since 2004—but failed to create a “line in the sand” for the yen, which has fallen nearly 4.4% since its early May peak of 156.25.
According to Kathy Lien of BK Asset Management, even significant intervention by the Bank of Japan may only provide only “a temporary reprieve.” She points out that the yen weakness is largely due to rising U.S. rates and greater expectations of Federal Reserve hikes. This makes sustained yen strength unlikely without the help of U.S. policymakers—and right now, that doesn’t appear to be imminent.
U.S. Treasury Secretary Scott Bessent, who held calls with Japan’s Katayama on yen weakness last month and agreed to the idea of “bold” steps to stem the yen’s decline, has gone largely silent.
The next days to mark in the calendar, then, are likely the Bank of Japan’s July 31 policy meeting, as well as Japan’s Mountain Day holiday on August 11, which could provide a window for coordinated intervention.
Write to Martin Baccardax at [email protected]
