The rare, coordinated intervention by the U.S. and Japan last month to strengthen the yen caught markets by surprise, but it's important to separate currency mechanics from the investment case on the country.
Japan's Ministry of Finance and the U.S. Treasury confirmed a joint yen-buying operation on August 1, the first coordinated intervention since 1998, with Japan spending an estimated $36–59 billion while the U.S. 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.
In our view, that move underlines that lasting support requires Bank of Japan rate rises, not currency action alone. Importantly, we believe 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 the BoJ
Interventions of this magnitude draw attention because the stakes extend beyond exchange rates. Japan is one of the largest holders of U.S. Treasuries, and funding large-scale yen-buying partly depends on selling those holdings—a dynamic that can push up U.S. 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. In our view, if U.S. rates and growth stay stronger while Japan doesn't raise rates further, the yen will remain under pressure regardless of intervention capital deployed.
The BoJ remains an outlier among developed-market central banks, continuing gradual hikes as it normalizes policy alongside fiscal stimulus. Attention has turned to a possible hike as early as September, with signs Prime Minister Takaichi's administration would support that timing. Even so, we believe 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 favors 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 1.00–1.25%.
The Limitations of Intervention
Even with the rate path we expect, U.S. 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 neutralize the incentive structure driving it.
To be clear, we’re not dismissing the intervention's significance. Finance Minister Satsuki Katayama and Treasury Secretary Scott Bessent have both signaled they "will not hesitate" to intervene again if disorderly moves resume. But a signal of resolve is not the same as a fix. Durable yen strength will likely require further BoJ normalization and a genuine narrowing of the rate gap with the U.S.—something intervention alone cannot deliver.
Importantly, 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. However, we have favored very long-end positioning, given the premium and steepness of the curve, which should normalize as the BoJ continues its gradual path.
Holding Conviction Over Currency Dynamics
Even though we have slightly adjusted our fixed income positioning, 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—as we highlighted in our recent piece Earnings Growth Moves Beyond the U.S.—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 like 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 jeopardizing that growth, in our view. This along with the structural improvement in shareholder governance keeps us optimistic about Japanese equities.
What to Watch For
Wednesday 08/19
- U.S. FOMC Meeting Minutes
- U.K. Consumer Price Index
- Eurozone Consumer Price Index
Thursday 08/20
- U.S. Initial Jobless Claims
- U.S. Philadelphia Federal Reserve Manufacturing Index
Friday 08/21
- U.S. Services Purchasing Managers' Index
- U.S. Manufacturing Purchasing Managers' Index
- Eurozone Purchasing Managers' Index
- Eurozone Manufacturing Purchasing Managers' Index