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Commerzbank analyst Michael Pfister examines recent joint US–Japan intervention to support the Japanese Yen. He notes confirmation that US authorities helped Japan and that further actions are possible, but constrained by IMF rules. Pfister argues the Yen is heavily undervalued, explores motives linked to US Treasuries and JGBs, and warns markets to brace for additional interventions.
US–Japan action and yen valuation
“This morning, official confirmation finally arrived that the US had lent Japan a hand with its interventions to strengthen the yen for the first time in many years, something that had been clear since Friday at the latest. Officials have emphasised that they are ready to carry out further interventions, although Thursday’s intervention alone is estimated to have been the largest single-day intervention to date.”
“The yen has been significantly undervalued for many years. According to OECD purchasing power parity, it is currently more than 60% undervalued against the US dollar. By way of comparison, the euro is undervalued by about 29%.”
“I suspect that the US was more concerned that US Treasuries might be sold off. Japan could have sold them to prop up the yen with the US dollars received, which would tie in with reports that Japan might make greater use of the Fed’s repo facility (i.e. deposit USTs there as collateral in exchange for cash).”
“However, if Japan intervenes again in the coming days, the Ministry of Finance will have effectively used up all its options until November in order to retain that status.”
“Until then, market participants should brace themselves for possible interventions later in today’s trading session.”
