Commerzbank’s Thu Lan Nguyen argues that the recent historic intervention in USD/JPY, powered by US Treasury participation, may not secure a lasting Japanese Yen (JPY) recovery. Nguyen highlights the finite nature of foreign reserves, questions reported Federal Reserve (Fed) euro sales, and warns that opaque communication could see markets re-test higher USD/JPY levels despite coordinated action.

Effectiveness of joint FX interventions

"USD/JPY has already surrendered part of its gains since last week's historic intervention. Impressive as the move was in terms of scale, there are good reasons to doubt that it will be enough to trigger a sustained appreciation of the yen."

"The fundamental problem with defending a weakening currency is that a central bank's foreign exchange reserves are finite. Had the Bank of Japan intervened on its own, markets would have known that its supply of US dollars was limited. The larger the intervention volumes, the faster those reserves would be depleted."

"The lesson is clear: even the central bank with the world's largest reserve war chest was unable to defend its currency indefinitely. The advantage of involving the Federal Reserve is therefore obvious. Unlike any other institution, it can create unlimited US dollars and sell them against the yen."

"For the yen to retain its gains, markets must be convinced that coordinated interventions by the BoJ and US authorities will remain on the table going forward. Treasury Secretary Scott Bessent has suggested that the United States would be willing to act again if necessary."

"By contrast, opaque measures such as reported Fed sales of euros do little to clarify the intentions of either the Fed or the BoJ. If anything, they risk creating additional uncertainty. Against that backdrop, it would not be surprising to see markets test the upside in USD/JPY again in the near future."

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