US Treasury Backs Yen Intervention as ING Cites 20% Undervaluation

The recent joint U.S.-Japan intervention to support the yen has received the backing of U.S. Treasury Secretary Scott Bessent, lending significant political weight to the effort. According to analysts at ING, Bessent's support suggests a strong conviction that the currency is poised for a rebound, underpinned by a deep undervaluation and expected policy shifts from the Bank of Japan (BOJ).

A Bet on Fundamentals

ING's Global Head of Markets, Chris Turner, noted that Bessent, a former hedge fund manager, has committed substantial political capital to the intervention, the first joint yen-buying operation since the 1998 Asian financial crisis. This confidence appears rooted in analysis suggesting the yen is fundamentally mispriced.

According to an ING note, the bank's fair-value model shows the Japanese yen is approximately 20% undervalued against the U.S. dollar, a gap that has persisted throughout 2026. Bessent's stance is also likely influenced by expectations of yen-supportive policy changes in Tokyo, including a faster pace of BOJ interest rate hikes. Markets are currently pricing in a roughly 75% probability of a BOJ rate increase in September, the note stated.

Structural Changes Needed for Lasting Strength

For the yen's appreciation to be sustainable, analysts believe Japan must encourage domestic capital to remain onshore. Turner highlighted Bank of Korea research showing that Japan retains 46% of its overseas investment income offshore as reinvested earnings, a significantly higher portion compared to Germany (28%) or Taiwan (18%).

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Tokyo's new growth strategy, announced in July, aims to deploy 370 trillion yen ($2.3 trillion) in public-private investment by 2040, a move intended to boost domestic returns. Turner pointed to historical precedents where central bank signaling successfully altered currency trends, such as actions by Sweden's Riksbank and Mexico's Banxico in 2023. However, he cautioned that a lasting yen recovery depends on stronger domestic growth and a supportive BOJ policy path.

Market Outlook

While Turner described potential structural reforms—like adding Japanese government bonds to NISA investment accounts or a domestic asset reallocation by Japan's Government Pension Investment Fund—as speculative, he concluded that Bessent is effectively "betting the yen will appreciate."

Reflecting this outlook, ING’s base case forecast sees the USD/JPY exchange rate falling to 158 by the end of 2026 and further to 152 by the end of 2027.