Il massive intervention at the end of July, coordinated between United States and Japan, in support of the yen It has reopened a classic question of economic policy: to what extent can the authorities correct a exchange rate when the market continues to move in the opposite direction?
The operation of the last few days has been exceptional in size. Estimates speak of approximately 13,8 trillion yen, just under 90 billion dollars, concentrated in just two sessionsThis is not the largest currency intervention in history in cumulative terms – Japan spent much more in the long campaign of 2003-2004 ($340 billion but to counter the appreciation of the yen and not its depreciation) – but it is difficult to find precedents of comparable size compressed into such a short period of time. Even more significant is the American involvement: not a unilateral initiative by Tokyo, but a joint political signal aimed at convincing operators that the depreciation of the yen had exceeded levels considered acceptable.
Rates and carry trades: why the Japanese currency remains fragile
The weakness of the Japanese currency, however, does not arise primarily from speculation. It reflects clearly recognizable fundamentals. The first is the interest rate differentialDespite the gradual tightening of the Bank of Japan, dollar yields remain significantly higher than those in yen (3,5-3,75 versus 1 percent). It therefore continues to be convenient for investors to finance themselves in Japanese currency to purchase dollar-denominated assets, fueling the carry tradeAdded to this are Japan's high energy dependence and the perception that the BoJ will proceed with extreme caution in monetary normalization.
This is a point consistent with a consideration formulated years ago by Ben Bernanke, long-time chairman of the Federal Reserve: in large economies the advantages of independent monetary policies and capital mobility tend to prevail over the costs resulting from exchange rate fluctuations. In other words, in the medium term the exchange cannot be indefinitely separated from monetary policies which determine the relative returns of the two currencies.
Currency Interventions: How Much Can They Really Change the Exchange Rate?
Here the l emergesstructural limit interventions in the foreign exchange market. Authorities can suddenly change the price of a currency, but not necessarily the economic factors that determine it. The same Bank for International Settlements, summarizing the experience of central banks, observes that currency interventions are generally considered effective, but "they are not a panacea." They work best when they correct excessive or temporary movements; much less when they try to counteract long-term macroeconomic fundamentals of opposite sign.
History confirms this distinction. Large and unexpected interventions can produce immediate corrections in the range of 2-5 percent. Maintaining them is more difficult: if interest rates, inflation, and capital flows continue to push in the previous direction, a considerable part of the movement is often reabsorbed within weeks. Research by Monetary Fund Internationally, in fact, finds evidence that central banks can effectively counteract short-term cyclical misalignments, rather than permanently determining the exchange rate level.
The yen holds firm, but the challenge remains linked to rates
This is exactly what the market seems to be trying to see this time. From a peak near 164 yen per dollar on July 30, the intervention immediately pushed the exchange rate up to around 155 on July 31, an appreciation of the yen of more than 5 percent. In the following days, however, the dollar is back above 158The result is not negligible: the yen remains significantly stronger than its starting point. But a significant portion of the initial effect has already been recouped.
Therefore, the real test is not so much the billions invested, but what will follow. If the action on the currency market is accompanied by a tighter Japanese monetary policy, or at least a credible revision of rate expectations, the effect could consolidateIf, however, the wide yield differential between the United States and Japan remains intact, traders will continue to have a structural incentive to sell yen.
The new element compared to the 2022 and 2024 interventions is American support. This significantly increases the signal value of the operation and makes it more risky for the market bet against TokyoBut it doesn't change the basic rule: currency interventions can buy time and shift expectations; they are unlikely to replace macroeconomic fundamentals for long.
