Background of the Intervention
In mid‑August, the Japanese government and the Bank of Japan stepped in to support the yen after it had fallen sharply against the U.S. dollar. The policy move was designed to curb a sharp depreciation that had been occurring over the previous month.
While the intervention succeeded in nudging the yen higher – from roughly ¥164 to the dollar before the action to about ¥155 immediately afterward – the rally was short‑lived. The currency quickly shed most of the gains and has since been trading near ¥159 per dollar.
Surge in Foreign Asset Buying
Data released by Japan’s Ministry of Finance show that Japanese investors net purchased more than ¥5 trillion of foreign equities and long‑term bonds in the two‑week period ending August 15. This is a stark reversal from the previous two weeks, when the same investors net sold over ¥300 billion of these assets.
Market observers say the temporary appreciation of the yen made overseas securities more attractive for domestic investors, allowing them to acquire foreign holdings at a relatively better exchange rate.
Carry‑Trade Dynamics Remain Strong
Jesper Koll, expert director at Monex Group, noted that “the intervention has turbo‑charged the carry trade for fundamental and long‑term investors.” He added that as long as borrowing costs in Japan stay below the returns available abroad, the incentive for carry trades will persist.
The Bank of Japan’s ultra‑low rates, combined with a wide U.S.–Japan 10‑year yield spread of roughly 1.8 percentage points, create a persistent disparity that encourages investors to borrow yen and invest in higher‑yielding assets elsewhere.
Institutional Investor Behaviour
Long‑term players such as pension funds and asset managers have continued to sell yen, according to Masahiko Loo, fixed‑income strategist at State Street Global Advisors. Loo said that the intervention addressed only a “symptom” and did not cure the underlying “disease” of Japan’s low borrowing costs and wide interest‑rate differentials.
Francis Tan, Asia chief strategist at Indosuez Wealth Management, echoed this sentiment, highlighting that the structural forces still favour carry trades even after the yen’s temporary rally.
New Positions in Higher‑Yielding Assets
Koll also observed that both retail and institutional investors used the stronger yen to establish new positions in non‑yen assets, particularly U.S. Treasury bills and bonds. Loo added that the market has become less one‑sided than before the intervention, but the incentives to fund positions in yen remain attractive as long as the U.S.–Japan rate differential stays wide.
Data on currency flows also points to sustained carry‑trade activity. Long‑term investors are selling low‑yielding yen in exchange for higher‑yielding G10 currencies, a pattern that suggests yen is being used as a funding source for positions elsewhere.
Speculative Bets on the Yen Evolve
Not all traders are simply riding the carry‑trade wave. Ashwin Binwani, founder of Alpha Binwani Capital, said that while institutional investors remain positioned against a basket of G10 currencies – led by the Australian dollar – some currency traders are rebuilding bearish bets on the yen as the intervention’s impact fades.
Binwani explained that after taking profits on long dollar‑yen positions following the U.S.‑backed intervention, he re‑established those positions just above 157, anticipating a future weakening of the yen. He believes each intervention‑driven rally could provide a better entry point for selling the currency.
Declining Net Short Positions
Despite the resurgence of carry‑trade activity, speculative positions against the yen have decreased. CFTC data show that leveraged funds cut net short yen positions from nearly 138,000 contracts at the end of June to 59,526 as of August 11, reflecting a market that has felt the authorities’ willingness to intervene.
Bottom Line
The temporary yen rally created a window for Japanese investors to deepen carry‑trade positions, with record purchases of foreign equities and long‑term bonds. While the intervention succeeded in briefly supporting the currency, the underlying structural incentives – low domestic rates and wide international yield spreads – continue to drive carry‑trade activity. As the yen’s strength wanes, the market may see a shift back towards more balanced positioning, but the fundamental dynamics that support borrowing in yen for overseas investment remain in place.