The rare, coordinated intervention by the US and Japan at the end of July to strengthen the yen caught markets by surprise but it is important to separate currency mechanics from the investment case on the country.
Japan’s Ministry of Finance and the US Treasury confirmed a joint yen-buying operation on 1 August – the first coordinated intervention since 1998 – with Japan spending an estimated $36bn to $59bn (£26.4bn to £43.3bn) while the US sold euros rather than dollars.
The scale of the operation helps explain the market’s initial reaction. Dollar/yen fell sharply from near 160 to the mid-150s, only to drift back toward 159 within days – just modestly off its pre-intervention extremes.
That move underlines that lasting support requires Bank of Japan rate rises, not currency action alone. Importantly, it has little bearing on the structural drivers – earnings growth, governance reform, policy-directed investment – that continue to underpin our constructive view on Japanese equities.
All eyes on BoJ
Interventions of this magnitude draw attention because the stakes extend beyond exchange rates. Japan is one of the largest holders of US treasuries and funding large-scale yen-buying partly depends on selling those holdings – a dynamic that can push up US yields even while defending the yen, historically making Washington cautious about joint operations.
That caution points to a deeper issue: intervention will not have a lasting effect without genuine policy change. Japan’s execution was clever, but it cannot substitute for a shift in the underlying rate differential. If US rates and growth stay stronger while Japan does not raise rates further, the yen will remain under pressure regardless of intervention capital deployed.
“Interventions of this magnitude draw attention because the stakes extend beyond exchange rates.
Intervention can blunt the sharpest edges of that dynamic temporarily, but it cannot neutralise the incentive structure driving it.”
The BoJ remains an outlier among developed-market central banks, continuing gradual hikes as it normalises policy alongside fiscal stimulus. Attention has turned to a possible hike as early as September, with signs prime minister Sanae Takaichi’s administration would support that timing.
Even so, the domestic hurdle for aggressive tightening remains high: decades of low growth and rates leave concerns about borrowing costs for mortgage holders and SMEs, while Japan’s high debt load means rapid hikes would weigh on debt-servicing costs as the administration favours fiscal expansion. We see the next increase coming in the fourth quarter, another in 2027, before cuts in 2028 bring policy to a neutral rate of 1.00% to 1.25%.
Limitations of intervention
Even with the rate path expected, US short-term rates are likely to remain several percentage points higher for some time. Intervention can therefore blunt the sharpest edges of that dynamic temporarily, but it cannot neutralise the incentive structure driving it.
To be clear, this is not to dismiss the intervention’s significance. Japan’s finance minister Satsuki Katayama and US treasury secretary Scott Bessent have both signalled they “will not hesitate” to intervene again if disorderly moves resume.
Durable yen strength will likely require further BoJ normalisation and a genuine narrowing of the rate gap with the US – something intervention alone cannot deliver.”
Yet a signal of resolve is not the same as a fix. Durable yen strength will likely require further BoJ normalisation and a genuine narrowing of the rate gap with the US – something intervention alone cannot deliver.
Japanese fundamentals and fiscal concerns have largely shaped our positioning, rather than the recent intervention. We remain underweight 10-year Japanese government bonds, reflecting those fiscal concerns as well as rising domestic inflation excluding subsidies. We have, however, favoured very long-end positioning, given the premium and steepness of the curve, which should normalise as the BoJ continues its gradual path.
Conviction over currency dynamics
Japan remains an equity market we continue to view constructively. Indeed, our overweight on the country is supported by several powerful factors: the economy’s global manufacturing exposure, semiconductor and AI supply-chain participation, corporate governance reform, rising buybacks, and improving shareholder returns.
Importantly, that structural case is showing up in the numbers. Second-quarter earnings confirm the thesis with the majority of Tokyo Stock Exchange Prime Market companies posting strong beat rates and robust year-over-year growth so far. Currency valuations are important drivers of global trade and are particularly critical to an export-driven economy such as Japan. Long-term economic growth rates, however, will ultimately be the driver of currency value.
Improving economic conditions in Japan should allow policymakers to raise rates without jeopardising that growth. This along with the structural improvement in shareholder governance keeps us optimistic about Japanese equities.
Joe Amato is president and CIO – equities at Neuberger
