Half of the record Japanese Yen intervention is already gone

On Thursday, the Dollar traded at 159.50 against the Japanese Yen, slightly higher than the session's range of just 55 pips. This midpoint sits near the 159.50 level, halfway between the pre-intervention peak of 164.00 and the low of 155.00 that Japan and the United States jointly targeted at the beginning of the month. Seven days after the largest Yen-buying operation ever conducted, half of it has already been returned.

No new intervention has been announced, nor has it been necessary as the market has unwound the move without assistance. Reports estimate the initial operation amounted to around 8.45 trillion Yen, with an additional 5.3 trillion Yen purchased the following day alongside the US Treasury. The subsequent decrease in the pair's value was from just under 164.00 to just above 155.00, narrowing the nine Yen gap to about two sessions.

Presently, the pair trades at 159.50, with four and a half of the nine Yen previously gained by intervention now back in the hands of those it aimed to assist. Official buying targets a level, not a trend. The total of the intervention won't be disclosed until two weeks later, as Japan's Ministry of Finance publishes its intervention figures monthly, with the deadline near the 28th.

Traders will analyze the number against a rate closer to the intervention's beginning rather than its end. One aspect of the announcement went relatively unnoticed. Japan announced it would finance future interventions through the Federal Reserve's repurchase agreement (repo) facility for foreign monetary authorities instead of through selling Treasuries.

This shift eliminates the historical cap on how much it could spend, making the half-recovered operation an unusual outcome. July's Producer Price Index (PPI) remained flat month-over-month (MoM) at 0.2%, with the year-over-year (YoY) rate at 4.7% from 5.5% and the core rate up 0.2% to 0.3%. Initial jobless claims were reported at 209K, consistent with expectations of 202K and above the previous 200K.

All these indicators suggest a weaker Dollar. Rate futures currently show a 65.2% chance of a September 16 hold at 65.2%, leaving a 34.8% probability of a hike at the meeting scheduled for August 10. The probability of the current range lasting the year is 34.1%, and there is no mention of intervening in 2026 meetings. The Dollar received a more favorable rate outlook on this day, while the Yen lost ground against it.

The carry trade does not require the Federal Reserve to raise rates; it needs the Bank of Japan's real policy rate to stay negative. Currently, Japan's policy rate stands at 1.00%, while inflation, which last reported at 1.7%, is comfortably below that threshold. A quarter point increase in Washington would change the size of this gap and does not affect its direction.

Energy plays a significant role in driving the currency's performance. Disagreements over reopening the Strait of Hormuz have resulted in reduced vessel traffic, and Japan imports nearly all the crude it consumes, making an energy shock a terms-of-trade tax on a net importer - a bearish factor for the Yen that cannot be countered by any amount of official buying.

On Friday, US retail sales for July will be released at 12:30 GMT, expected at 0.1% against 0.2% previously. At 14:00 GMT, the preliminary University of Michigan sentiment index will be at 54.5 against 55.2. These inflation expectations are more critical than the headline given the current September pricing. Japan's own calendar features more weighty economic data.

Preliminary second-quarter (Q2) GDP is due on August 16 at 23:50 GMT, with growth expected at 0.5% and the annualized rate at 2% against 1.8% previously. Trade figures for July are expected on August 19, and national inflation will be reported on August 20, with the headline at 1.7% and the core rate at 1.6%. These inflation figures will determine whether the Bank of Japan can support June's move to 1.00% with another increase.

If the print is near 1.7%, the real rate will remain deeply negative, compelling the Ministry of Finance to defend the level that its central bank is not aiding in defending. The FOMC minutes on August 19 are released within the same timeframe. Resistance lies at the 50-day Exponential Moving Average (EMA) just under 160.50, which is declining into the price, with the 160.00 handle below it as the next barrier.

Above that level, the pre-intervention peak near 164.00 remains as the sole structure on the chart. Support is found at the 159.00 area, which held during the session, with 158.00 and the rising 200-day EMA below it as the next support. Underneath that lies the intervention's low of just above 155.00, the price that the operation paid for.

The bias remains bullish as long as 158.00 holds, with 160.50 as the objective and a daily close above it opening the 162.00 area. If the daily close falls beneath 158.00, putting the recovery back in official hands, it would invalidate the bias. Current momentum suggests patience over chasing, with the Stochastic Relative Strength Index (Stoch RSI) near 24 and falling while price is gradually rising.

The Japanese Yen (JPY) is among the most actively traded currencies globally. Its value is primarily influenced by the performance of the Japanese economy but is also affected by the Bank of Japan's policy, the difference between Japanese and US bond yields, and market risk sentiment among traders, among other factors. One of the Bank of Japan's mandates is currency control, so its moves have a significant impact on the Yen.

The BoJ has occasionally directly intervened in currency markets, primarily to lower the Yen's value, although its intervention is rare due to political concerns over its main trading partners. The ultra-loose monetary policy pursued by the Bank of Japan from 2013 to 2024 resulted in the Yen depreciating against the US dollar.