The yen is once again approaching 160, but the bears are hesitant to act? Goldman Sachs analyzes Japan's trillion-dollar "intervention ammunition"

According to the Zhitong Finance APP, Goldman Sachs stated that Japan has enough cash on hand to support several rounds of yen intervention operations similar to last month's historic scale, and that Japanese authorities can also obtain funding support from the Federal Reserve. Goldman Sachs estimates that of Japan's approximately $1 trillion in foreign exchange reserves, about $200 billion is held in cash or highly liquid equivalents—roughly equivalent to the scale of Japan's intervention actions in July.

Goldman Sachs research strategist Karen Fishman said on Wednesday, "They have enough resources to conduct several more rounds of the historic record-level transactions we just saw."

"In reality, they are unlikely to use all their funds, but I think this precisely indicates that if they are willing, they are fully capable of continuing to intervene in the market," Fishman said.

Federal Reserve FIMA Tool: Theoretical "Infinite Backing"

In addition to its own cash reserves, Goldman Sachs also specifically mentioned the Federal Reserve's "Foreign and International Monetary Authorities Repo Facility" (FIMA). This mechanism allows central banks to use their holdings of U.S. Treasury securities as collateral to borrow U.S. dollar cash from the Federal Reserve, enabling them to quickly raise the dollar funds needed for intervention without having to sell U.S. Treasuries in the secondary market.

Fishman explained that with this tool, Japan could theoretically convert all of its approximately $1 trillion in foreign exchange reserves (including non-cash forms of U.S. Treasuries) into usable liquid funds. The Japanese Ministry of Finance has previously stated that it plans to use this mechanism as needed.

Fishman noted that given that the U.S. has intervened in the yen exchange rate in cooperation with Japan for the first time since 1998, this statement "has a certain degree of credibility." Additionally, after the earthquake in 2011, Japan and the U.S. coordinated actions with other G7 member countries to curb the appreciation of the yen.

This prospect has significantly changed market sentiment. Pranith Shah, head of foreign exchange options trading at Goldman Sachs, stated that after clients learned last week that Japanese authorities could utilize the Federal Reserve mechanism to mobilize trillion-dollar reserves for intervention, bullish sentiment towards the yen has significantly increased.

The Effect of Historic Intervention Fades, Yen Retraces Half of Its Gains

Looking back at last month, Japan and the U.S. jointly intervened in the foreign exchange market for the first time since 1998, with Japanese authorities using up to $85 billion in funds over two trading days, a scale second only to the intervention record following the Fukushima nuclear disaster in 2011.

Before the U.S.-Japan joint intervention, the yen exchange rate fell to 164 yen per dollar, hovering near a nearly 40-year low. The intervention action successfully pushed the yen exchange rate up to the 158 range, breaking above the 200-day moving average. However, the effects of the intervention are fading: on Wednesday, the yen exchange rate against the dollar fell back to the critical 160 level, having retraced about half of the gains brought by the intervention.

Fishman stated that this intervention "is not a sustainable solution... ultimately just buys some time." Fishman also pointed out that Japan's unilateral interventions in April and May this year serve as a cautionary tale—after a brief rise, the yen once again reached a 40-year low within months.

Future Triggers for Intervention: Interest Rate Differentials, Data, and Central Bank Meetings Shaah stated that whether Japanese authorities will intervene in the foreign exchange market again may depend on the interest rate differential between Japan and the United States, which remains the main driving factor for the depreciation of the yen.

Later on Wednesday, the yield on the 10-year U.S. Treasury was 4.690%, while the yield on the 10-year Japanese government bond was 2.839%, providing significant incentive for investors to hold U.S. Treasuries.

In Japan, the market currently expects a 65% chance that the Bank of Japan will raise interest rates by 25 basis points in September, tightening rates by about 40 basis points by the end of the year. Fishman stated, "If they do not raise rates in September, it will again put downward pressure on the yen." Shaah pointed out that the Bank of Japan needs to raise rates faster than the market expects to change the arbitrage trading pattern that has led to a depreciation of about 45% in the yen over the past five years.

In the United States, Shaah indicated that weak economic data could alleviate pressure on the yen—this would weaken the rationale for further rate hikes by the Federal Reserve and reignite market expectations for Japanese intervention. He specifically mentioned the scenario in July 2024: at that time, the Bank of Japan and the Ministry of Finance conducted a round of the most effective intervention, coinciding with U.S. CPI data falling short of expectations, followed by non-farm data also disappointing a few days later.

He stated, "If U.S. economic data unexpectedly weakens, I believe the market will start to raise expectations for subsequent intervention later this week."

The U.S. inflation data released on Wednesday met expectations. The data showed that the Consumer Price Index rose by 0.1% in July, in line with general market expectations; the annualized inflation rate fell from 3.5% in June to 3.4%. Following the report, U.S. Treasury yields retreated.

In summary, Goldman Sachs believes that Japan still has ample "ammunition" for foreign exchange intervention—whether it is the $200 billion cash reserve or the theoretically available $1 trillion reserves through the Federal Reserve's FIMA tool, both provide strong policy options for Japanese authorities. However, intervention is ultimately just a stopgap measure, and the long-term direction of the yen's exchange rate will still depend on the evolution of the U.S.-Japan interest rate differential and the actual trajectory of monetary policies in both countries. The Bank of Japan's policy meeting in September will be a key juncture for the market to assess whether this round of yen movement can continue.

Options pricing shows that traders remain wary of another surge in the yen, and this concern itself may suppress new selling pressure. Shaah noted that the high premiums on short-term yen call options indicate that the market is still alert to the possibility of a sudden jump in the yen, which makes investors reluctant to short the yen when it falls back to around 160.

He stated, "If the spot exchange rate really approaches 160, and the market has fully priced in the risk of a significant pullback, then continuing to sell the yen will face real risks."