What the US-Japan Currency Intervention Means for the Yen, Rates, and the Dollar
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The United States and Japan have coordinated the largest currency market intervention in fifteen 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 Pruneet Shah, who leads foreign exchange options trading within our global banking and markets business. Pruneet is joining me from London, and Karen is here with me in th
Thanks, Allison.
Karen, let's first level set for the generalist. Talk us through what happened and why this is a big deal.
So on July 30, Japan conducted or began its biggest intervention in the FX market in fifteen 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 forty 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 interdealer trading volumes and BOJ data. And so there are a n
I wanna 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?
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
But remind us why a weaker yen is something Japan doesn't want.
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.
So the case of Japan's interest in this intervention, I think, is pretty clear, as you just But why does The US want to be involved? What does it get from a stronger yen, a more stable yen?
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