Goldman sees Japan's $1 trillion reserves backing more yen intervention

Japan's roughly $1 trillion in dollar reserves gives Tokyo enough firepower for several more yen-buying operations on the scale of last month's record intervention, Goldman Sachs said, even as the yen fades.

"They already have at their disposal enough to do another couple rounds of what we just saw," Karen Fishman, a Goldman Sachs Research strategist, said on the bank's Exchanges podcast published Wednesday. "Realistically, they wouldn't come close to using all of that, but I think that just sort of hits home the point that they have plenty of capacity to keep intervening if they wish."

Of Japan's roughly $1 trillion in dollar reserves, about $200 billion sits in cash or cash equivalents — likely the size of the July operation. Goldman estimates Tokyo deployed as much as $85 billion in the first two days of last month's coordinated action with Washington, the largest two-day foray into currency markets since October 2011, when Tokyo intervened after the Fukushima disaster. The yen strengthened past its 200-day moving average of 158 per dollar following the intervention but has since slipped back toward the key 160 level, giving back about half the gains.

Whether Tokyo pulls the trigger again hinges on the rate differential between Japanese and US borrowing costs, which remains the overwhelming driver of the exchange rate, according to Goldman. The Bank of Japan's policy rate sits at 1 percent versus the Federal Reserve's 3.5-3.75 percent target range. The 10-year US Treasury yield stood at 4.690 percent late Wednesday versus 2.839 percent for Japanese government bonds, leaving investors with a substantial incentive to hold dollar assets. Markets price a 65 percent chance of a 25-basis-point BOJ hike in September and about 40 basis points of tightening by year-end.

FIMA facility expands Tokyo's war chest

Japan's finance ministry has said it plans to use the Federal Reserve's FIMA repo facility, which lets central banks raise dollar cash against their Treasury holdings without selling them on the secondary market. Access to the facility would theoretically make the full $1 trillion available in liquid form, Fishman said. Treasury Secretary Scott Bessent has argued the facility should be expanded because the Treasury market has grown substantially since FIMA was introduced in 2020.

The prospect of a much bigger war chest has already shifted sentiment. Clients "really did get quite bulled up on the yen" last week once the Fed facility potentially put the full $1 trillion within reach for intervention, Praneet Shah, head of FX options trading at Goldman, said in the podcast. Options pricing shows traders are still bracing for another sharp yen surge, with elevated premiums on short-dated yen calls pointing to a market on guard for a sudden gap move.

"If spot is trading up into 160, there's a real risk that you don't want to continue selling yen when you've got this large risk of a drawdown still priced by the market," Shah said.

Rate path and data determine next move

The BOJ would need to hike faster than expected to shift the carry dynamics that have driven a 45 percent yen depreciation over five years, Shah said. On the US side, cooler economic data could ease pressure on the yen by weakening the case for the Fed to hike rates further. Shah pointed to July 2024, when one of the most effective rounds of BOJ-MOF intervention landed on a US CPI miss, compounded by a payrolls miss days later.

"Any misses, I think the market will really start to increase expectations of a subsequent intervention later this week," he said.

Wednesday's inflation report came in line with expectations. The consumer price index rose a seasonally adjusted 0.1 percent in July, matching consensus forecasts, while the annual rate eased to 3.4 percent from 3.5 percent in June. Treasury yields pulled back after the release.

The intervention is "not a sustainable fix ... ultimately just buys some time," Fishman said, noting that after Japan's solo action in April and May, the yen was back at 40-year lows within months. Japan spent 11.7 trillion yen between April 30 and May 6, including a record 6.28 trillion yen, roughly $40 billion, on April 30 alone.

The coordinated US-Japan action in late July came after the yen slid toward 164 per dollar, near its weakest level in four decades. Washington joined Tokyo for the first time since 1998, with the US Treasury acting through the Federal Reserve Bank of New York, purchasing yen with euros rather than selling dollars directly. The intervention helped the currency gain around 5 percent, lifting it from nearly 164 to about 155 per dollar.

Japan's official reserves stood at $1.287 trillion at the end of July, including $927.332 billion in foreign-currency securities, according to Ministry of Finance data. The country remains the largest foreign holder of US Treasuries, with securities attributed to Japanese holders totaling approximately $1.143 trillion at the end of May.

A disorderly yen reversal could also ripple through global risk assets. The yen's role as a cheap funding currency means a sharp squeeze could force leveraged carry-trade positions to unwind, hitting US technology shares and other high-beta equities — a dynamic that played out in August 2024 when leveraged funds cut net yen shorts from roughly 70,000 contracts to 24,158 in a single week.

This article is for informational purposes only and does not constitute investment advice.