Yen-buying intervention's sustainability hinges on Fed resolve and BOJ hikes
2026-08-02
Warsh and the Market Gap
The government and the BOJ stepped in to buy yen. It was a move that seized on the gap between the hawkish stance signaled by new Federal Reserve Chair Warsh and the market's view. How far it can curb yen weakness will depend on the Fed's stance and the course of the rate-hike race with the BOJ.
The intervention was carried out after close coordination with U.S. authorities. The show of Japan-U.S. cooperation has some influence, but it remains unclear whether it can fundamentally change the direction of the market. The success or failure of the intervention will depend on whether officials can identify a turning point and support the moment when the trend shifts.
In congressional testimony in mid-July, Warsh repeatedly voiced his determination to end persistently high inflation even as weak U.S. price data continued. Markets reacted to his carefully limited communications and raised bets on rate hikes.
The tone changed when the Federal Open Market Committee (FOMC) decided on the 29th to keep policy rates unchanged. Markets, which had braced for a surprise rate hike, were disappointed, and they were rattled when Warsh made no mention at his news conference of specific steps to ensure price stability. At one point, markets saw a triple selloff, including dollar selling.
Then on the 30th, the personal consumption expenditures (PCE) price index for June slowed, and caution spread over fresh dollar buying. At that point, heavy yen buying is believed to have entered the market.
Intervention Effect and Differences From 2024
However, it is unlikely this intervention will lead to a sharp reversal in the yen like the one seen in 2024. At the time, a surprise BOJ rate hike followed intervention, while weaker U.S. jobs data also triggered a sharp fall in U.S. and Japanese stocks. Often overlooked is the important point that the deterioration in U.S. data led to a rate cut in September.
This time, expectations for U.S. rate hikes have eased somewhat since the FOMC, but they have not disappeared. The inflation backdrop is also different. The effects of higher crude oil prices remain, while a sharp expansion in demand linked to artificial intelligence (AI) has emerged as a new factor pushing up prices.
It is still difficult to tell whether Warsh is a dove wearing a hawkish mask or is genuinely hawkish. Even so, his path to defeating inflation is expected to unfold in three stages: promises, accountability and the use of tools. The rate-hike answer the market is looking for may still be some time away.
On the other hand, investors continue to harbor doubts that he may simply be buying time to avoid rate hikes. Views are likely to harden from September onward, when verification by the task force progresses and the conclusion begins to come into focus.
The BOJ Also Has Yen Weakness in View
The focus is the comparison with the BOJ. The BOJ kept policy unchanged at its July 31 policy meeting, but Governor Kazuo Ueda repeatedly emphasized upside risks to prices at his news conference and indicated that he intended to deepen discussion of rate hikes. In its Outlook Report, the BOJ also positioned yen weakness alongside higher crude oil prices and AI demand as a factor pushing up prices, and clearly stated that it would be a key to any rate-hike decision. That carries no small significance for policy management.
In particular, the fact that it listed yen weakness as a main upward factor in its baseline price outlook shows that the BOJ is confronting the currency's decline head on. If intervention eases yen weakness, the urgency for a rate hike will fade, but unless the currency moves back the way it did temporarily to the 130-yen range in 2024, the exchange rate could directly affect rate-hike decisions.
The common issue at this round of central bank meetings in Japan and the U.S. was how to deal with inflation pressure from AI demand. The shared factor of AI inflation could sound the starting gun for a rate-hike race between Japan and the U.S. Its outcome is likely to greatly influence the effect of the intervention.
Concern over a weaker currency is pushing the BOJ, while the Fed still has the advantage on economic resilience. If Warsh moves in earnest to curb inflation, the Fed also has more room to raise rates. The cuts from the recent peak amount to 1.75 percentage points. Even if the BOJ signals faster hikes, stepping into a rate zone above 1% involves the difficulty of feeling its way toward the neutral rate. The outcome of the race is still impossible to gauge.
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