US Treasury Backs Yen Intervention as ING Cites 20% Undervaluation

A late-July joint intervention by the U.S. and Japan to purchase yen could mark a significant turning point for the struggling currency, according to analysis from ING. The move, the first of its kind since the 1998 Asian financial crisis, has received strong backing from U.S. Treasury Secretary Scott Bessent, who is staking significant political capital on its success.

Bessent's Bet on a Policy Shift

According to Chris Turner, Global Head of Markets at ING, Secretary Bessent's confidence stems from a belief that the yen is fundamentally undervalued and an anticipation of key policy shifts from the Bank of Japan (BOJ). Bessent, a former hedge fund portfolio manager, appears to be betting that the BOJ will accelerate its pace of interest rate hikes.

This sentiment is increasingly reflected in market pricing, which currently indicates an approximate 75% probability of a BOJ rate hike in September, the report noted. Turner compared the move to historical precedents where central bank signals successfully altered currency trajectories, such as actions by Sweden's Riksbank and Mexico's Banxico in 2023.

Yen Seen as Significantly Undervalued

ING's quantitative models support the view that the yen has substantial room to appreciate. The bank's Behavioral Equilibrium Exchange Rate model, which considers factors like terms of trade, productivity, and government spending, indicates that the USD/JPY pair is overvalued by more than 20%.

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Francesco Pesole, an FX Strategist at ING, stated that the model shows this significant overvaluation persisting throughout 2026. This analytical foundation provides a strong rationale for the intervention and underpins Bessent's position that the yen's weakness is disconnected from economic fundamentals.

Structural Hurdles Remain

A sustained rally for the yen will likely require structural changes that encourage Japanese capital to remain onshore. According to research cited by ING, Japan currently reinvests 46% of its overseas investment income abroad, a higher rate than South Korea (40%), Germany (28%), and Taiwan (18%).

Tokyo's new growth strategy, which aims to deploy ¥370 trillion (approximately $2.3 trillion) in public-private investment by 2040, is central to this effort. Turner noted that further speculative measures could include adding Japanese Government Bonds (JGBs) to NISA investment accounts or the Government Pension Investment Fund (GPIF) reallocating assets domestically. A sustained yen appreciation is contingent on boosting domestic returns, strengthening economic growth, and a supportive BOJ policy path.

ING's baseline forecast sees the USD/JPY exchange rate falling to 158 by the end of 2026 and further to 152 by the end of 2027.