Strategist explains why U.S. yen support is built to fail
U.S. efforts to support the Japanese yen are unlikely to produce a lasting recovery as Japan's economic policies, interest-rate gap, and preference for a weaker currency continue to work against the intervention, according to Yardeni Research.
Intelligence analysis by Llama
U.S. efforts to support the Japanese yen are unlikely to succeed due to Japan's economic policies, interest-rate gap, and preference for a weaker currency.
Imagine you're trying to help a friend who's struggling with their weight. You want to give them a magic pill to make them lose weight, but the problem is that they also love eating sweets. If you just give them the pill without helping them change their eating habits, they might lose weight for a little while, but they'll probably just go back to eating sweets and gain the weight back. That's kind of like what's happening with the U.S. trying to help the Japanese yen. Japan's economic policies and interest rates are like the friend's love of sweets, and they're making it hard for the yen to recover.
Analysis
Japan's Economic Policies Favor a Weaker Currency
Japan's economic policies, including its 8% consumption tax and $2.3 trillion investment program, benefit from a soft currency, which supports exporters and corporate profits. A stronger yen could reduce imported inflation but would weaken exports, offsetting part of the planned fiscal stimulus. Faster Bank of Japan interest-rate increases would also raise financing costs for a government carrying a heavy debt burden.
Structural Gap Between U.S. and Japanese Interest Rates
The structural gap between U.S. and Japanese interest rates is another obstacle to U.S. efforts to support the yen. The BOJ kept its policy rate below 1% at its latest meeting as the Federal Reserve signaled further tightening. Japan's 10-year government bond yield has climbed to around 2.8%, its highest in three decades, but remains well below the roughly 4.7% yield on comparable U.S. Treasuries. That difference continues to favor the dollar and encourage yen-funded carry trades.
Design of the Intervention
The design of the intervention itself is also a concern. The U.S. Treasury reportedly sold euros rather than dollars to purchase yen on July 31, suggesting Washington was unwilling to directly weaken the dollar. Using euros reduced the operation's effect on USD/JPY and avoided signaling a broader change in U.S. dollar policy. Without policy shifts in Tokyo or direct dollar selling by Washington, coordinated action may provide only temporary support for the yen.
Key points
- U.S. efforts to support the Japanese yen are unlikely to produce a lasting recovery.
- Japan's economic policies, interest-rate gap, and preference for a weaker currency continue to work against the intervention.
- The structural gap between U.S. and Japanese interest rates is another obstacle to U.S. efforts to support the yen.
- The design of the intervention itself is also a concern.
If the U.S. and Japan can work together to address the structural issues and design a more effective intervention, it's possible that the yen could recover and stabilize.
However, if the U.S. and Japan fail to address the underlying issues, the yen could continue to weaken, leading to further economic instability and potential trade tensions.
Market signals
- Japanese Yen The yen's weakness is driven by Japan's economic policies and interest-rate gap, which continue to favor a weaker currency.
AI-generated analysis of potential market relevance. Not financial advice.