US Yen Support Unlikely to Last Amid Policy Conflicts, Strategist Warns

A recent U.S. intervention to prop up the Japanese yen, the first since 2011, is unlikely to produce a lasting recovery for the currency, according to an analysis by Yardeni Research. The firm argues that fundamental policy conflicts in Tokyo and a wide interest-rate differential with the U.S. create significant headwinds against a sustained yen rally.

Core Obstacles to a Stronger Yen

The U.S. recently moved to support the yen after it fell to levels last seen in 1986, with Treasury Secretary Scott Bessent calling the currency “very undervalued.” However, Yardeni Research identified three primary reasons why the intervention's effects may be temporary:

• Japan's Domestic Agenda: The Japanese government's economic policies still benefit from a weaker currency to boost exports and corporate profits.
• Interest Rate Disparity: A significant gap between U.S. and Japanese bond yields continues to favor the dollar and encourage capital outflows from the yen.
• Indirect Intervention: The U.S. Treasury reportedly used euros, not dollars, to buy yen, signaling a reluctance to directly weaken its own currency.

Policy Divergence at Home and Abroad

Japan's government, led by Prime Minister Sanae Takaichi, is pursuing a fiscal stimulus plan that includes cutting the consumption tax and launching a $2.3 trillion investment program. A weaker yen supports this agenda by making Japanese exports more competitive, while a stronger yen would counteract the stimulus by hurting exporters. Furthermore, any significant interest rate hikes by the Bank of Japan to strengthen the yen would raise borrowing costs for the nation's heavily indebted government.

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This contrasts sharply with the U.S., where the Federal Reserve has signaled further monetary tightening. The policy divergence is reflected in bond markets, where Japan's 10-year government bond yield stands at around 2.8%, well below the roughly 4.7% yield on comparable U.S. Treasuries. This wide differential incentivizes investors to engage in yen-funded carry trades—borrowing in low-yielding yen to invest in higher-yielding dollar assets.

Intervention's Design Limits Impact

The effectiveness of the support operation is also constrained by its design, the research note suggests. The U.S. Treasury reportedly sold euros to purchase yen on July 31, rather than selling U.S. dollars directly. This approach muted the direct impact on the widely watched USD/JPY currency pair and suggested Washington was not committing to a broader policy of dollar weakening.

Without fundamental shifts in Japan's economic policy or a more direct intervention involving dollar sales from Washington, coordinated actions are likely to offer only temporary relief for the Japanese currency, the analysis concluded.