Japanese Yen: Intervention faces persistent rate gap – HSBC

HSBC Asset Management reviews recent coordinated intervention by Japanese and US authorities to support the Japanese Yen, recalling the sharp carry-trade unwind during the previous episode two years ago. The report argues that, despite near-term support and short positioning risks, persistent US inflation and cautious Bank of Japan tightening leave rate differentials weighing on the currency’s medium-term outlook.

FX action versus rate differentials

"Two years ago, global markets were jolted by a surge in the Japanese yen – triggered by authorities intervening to support the currency in FX markets, plus a surprise shift in policy rate expectations. This caused a sharp unwind of the yen “carry trade” – where traders borrow in yen to buy higher-yielding overseas assets – and it sparked widespread volatility."

"Recently, Japan’s authorities stepped in again to support the yen – this time in coordination with the US – sending a strong market signal. But the backdrop today looks less supportive of a sustained yen recovery than it did in 2024. Despite firmer inflation, the Bank of Japan has been cautious about signalling a faster tightening path."

"By contrast, persistent US inflation and more hawkish Fed signalling have pushed expectations towards higher US rates."

"FX intervention can boost the currency in the near term. And a significant net short positioning of the yen implies risks of a sudden appreciation. But for the time being, rate differentials fundamentally weigh on the currency’s outlook."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)