Japan

Flash Philo on Yentervention

You always need an angle

The long-awaited intervention on the Japanese Yen finally arrived last Thursday, July 30th.

I was short USD/JPY for weeks on a full position (100% of NAV) at 160.71 Yen – and had to endure losses as the pair broke the key level of 161-162, even moving up to 164 before it reversed.

Frankly, I don't know what took Bessent and the Japanese so long, but I note the interesting timing of it all.

July 30: Intervention
July 30: BOJ monetary policy meeting, begins
July 31: BOJ monetary policy meeting, ends: Rates held at 1%

Battling a Run on the Yen

The Yen has depreciated ~10% since Takaichi was elected Prime Minister.

Markets needed resolve from the BOJ and another hike to 1.25%. That would help narrow the interest rate divergence between the USD and the JPY – and put a bottom under the Yen. Mostly because of a sentiment reversal than any real changes in the fundamental picture.

The BOJ however left rates steady at 1%. Maybe that's what the joint intervention wanted to pre-empt: A crashing Yen and a move toward 170 Yen on the Dollar. A scary figure for Japanese savers, importers, but also the authorities.

Bessent, on his side, needed to pre-empt a run on the Yen because that could in turn cause a run on US treasurys.

The 10-Year Yield is hovering just below multi-year highs, a level we have been eyeing for a long time.

The 5% level is an extremely important psychological level for markets and at the same time, a line in the sand for policymakers.

The Key Interplay: Markets & Politics

The Japanese hold just under $1.2 trillion in US treasurys, making them the largest holders.

The last thing the Americans need is a scenario where the Japanese are forced to sell treasurys to defend the yen and stabilise their economy.

We are in a situation where financial stability in Japan is linked to financial stability in the US, and vice versa.

This enables us to set levels on the Yen and have reasonable expectations as to how it could react at those prices.

In late May we published a piece on Takaichi and her achieving a cult-like status in Japan. We connected the Takaichi social phenomenon with the macro setup in the country – trying to make sense of what outcome the interaction between the two will lead to.