The joint intervention of the US and Japan may become a “watershed” in the yen trend. Institutions: The dollar is close to peaking against the yen and is expected to rise to 125 in the long term

The Zhitong Finance App learned that after a rare joint intervention in the foreign exchange market between the US and Japan, the market's expectations for the long-term trend of the yen are changing. Stephen Jen, CEO of asset management agency Eurizon SLJ Capital, believes that this joint action may be a “watershed moment” for the Japanese yen market. The exchange rate of the US dollar against the yen is likely to have peaked, and the possibility that the yen will fall back to the low of more than 40 years previously hit in the future has declined markedly.

Jen and the agency's economist and portfolio manager Joana Freire said in a report to clients on Tuesday that both the US and Japan will not easily make concessions to the market, so the dollar “probably peaked” against the yen. The two emphasized that the central signal sent by this intervention is that both the US and Japan want to push the dollar lower against the yen.

This action is the first time since 1998 that the US and Japan have jointly bought yen in an attempt to reverse the trend of the continued depreciation of the yen.

Over the past period, since US interest rates have been higher than Japan's for a long time, the large interest rate spread between the US and Japan has continued to attract Japanese investors to allocate capital to overseas assets, putting depreciation pressure on the yen. The US dollar once approached 164 against the yen last month, and the yen fell to a low level in decades.

After the implementation of the joint intervention, the yen clearly rebounded for a while. According to data from the US Commodity Futures Trading Commission (CFTC) as of August 4, hedge funds have cut short positions betting on a further decline in the yen, indicating that speculative funds are beginning to reassess the risk of continuing to short the yen.

However, the gains brought about by the intervention later rebounded. Currently, the US dollar has recovered to around 159.30 against the yen, but it is still below the high of close to 164 last month.

US Treasury Secretary Bessent said earlier that the US is still willing to support Japan, which further strengthens the market's expectations that the US and Japan may continue to take action.

Some people on Wall Street believe that in addition to stabilizing the yen, America's participation in the intervention may also be related to the US treasury bond market. If the yen continues to depreciate sharply, the Japanese authorities may need to raise intervention funds by selling US dollar assets such as US Treasury bonds, which may increase supply pressure on the US bond market and further push up long-term US interest rates.

Therefore, in the context of the US itself facing high treasury yield and financing cost pressure, avoiding an uncontrolled depreciation of the yen is also in the interest of the US in stabilizing the financial market.

Eurizon is more optimistic about the yen's medium- to long-term outlook. The agency predicts that the yen may eventually rise to the level of about 125 yen to 1 US dollar, but it did not give a specific timeline for achieving this goal.

If it rises from the current level of about 159.30 to 125, it means that the yen will need to appreciate by more than 20% against the US dollar. This also shows that the agency believes that this joint intervention between the US and Japan is not simply a short-term market operation, but may mark a deeper change in the exchange rate policy environment.

Jen and Freire said that the market has long needed to readjust expectations for the trend of the dollar against the yen. In their view, the most important message of this joint intervention is that both the US and Japan have clearly shown their determination to push the dollar down against the yen and prevent the yen from depreciating further sharply.

However, judging from recent trends, the intervention did not completely reverse the depreciation pressure on the yen. The return of the US dollar to around 159 yen also means that interest spreads, capital flows, and market expectations for US and Japanese monetary policy will continue to affect the exchange rate. The future market focus will be on whether the US and Japan will once again enter the market and whether changes in monetary policy between the two countries can further reduce interest spreads in terms of fundamentals.