The playbook was outdated by the time Japan’s Ministry of Finance entered the currency market on the final day of April. In relation to the dollar, the yen had fallen below 160. Vice Finance Minister Atsushi Mimura referred to the “final evacuation advisory” that officials had been issuing for days. Then came the purchasing, which was quiet, abrupt, and costly. By the end of May, Japan’s defense had spent more than $27 billion over a number of rounds; some estimates place the total cost of Golden Week and subsequent rounds closer to $35 billion.
The market hardly reacted at all. Sitting with that part is worthwhile. A sovereign government using tens of billions of dollars to support its currency should, under normal circumstances, result in something other than a courteous, two-day rally. On April 30, the yen increased by nearly 3% before drifting. On Wednesday in early May, it briefly increased to 155 before falling back toward 156 in a matter of hours. After watching the screens and taking their profits, traders resumed selling. There’s a feeling that intervention is now more of a planned event that you trade around rather than against.
This involves some simple math. Japan still has foreign exchange reserves of about $1.16 trillion, which may seem insurmountable until you divide it. According to Francis Tan of Indosuez Wealth Management, Japan could potentially intervene roughly 32 more times at a cost of $34.5 billion per round. However, that sentence does a lot of theoretical work. Tokyo is more concerned about losing its “freely floating” classification than it would like to acknowledge, but the IMF only permits two more interventions through November. Thus, there are many shells in the bazooka. The majority of them simply cannot be fired.
The interest rate gap is the more serious issue that the Ministry of Finance is unable to effectively resolve with a wire transfer. For years, American yields have been significantly higher than those of Japan. In the same way that water flows downhill, money flows toward yield. The structural pressure on the yen persists until the Bank of Japan raises rates significantly, and markets have already factored in the majority of what they anticipate Governor Ueda will do. Tokyo is buying time rather than engineering a recovery, according to BCA Research’s direct description of the late-April move. That seems appropriate.
It’s difficult to ignore how this is getting worse due to geopolitics. Due to the conflict between the United States, Israel, and Iran that started in late February, the price of oil has remained high and the dollar is automatically regarded as a safe haven. Nearly all of Japan’s energy comes from imports. Therefore, the very factor driving the yen’s decline—expensive crude—also makes Japanese households‘ lives more difficult as a result of the yen’s decline. After only a few months in office, Finance Minister Satsuki Katayama is clearly overburdened. Throughout the holidays, she advised reporters to keep their phones on. That is not the words of a minister who is certain that the worst is over.
It’s difficult to ignore the historical resonance here. The BOJ spent nearly $60 billion in 2022 to combat a similar decline. An additional $36.8 billion in 2024. Every time the yen rose, it went back to its gradual decline. Carry traders picked up the beat. For so long, hedge funds in Singapore and London have accumulated bearish yen positions that the industry has its own folklore: the widowmaker who never quite makes widows.
The odd thing about this is not that Japan continues to get involved. The nation still feels compelled to. It has a political theater component. Even if it doesn’t move the chart for very long, the visible defense of the currency is important domestically. It’s genuinely unclear if that will be sufficient to get Tokyo through the summer. The dollar is still up for bid. Effectively, the Strait of Hormuz remains closed. And somewhere on a Mayfair Bloomberg terminal, someone is shorting the yen once more, wagering that the next $27 billion will land as gently as the previous one.
