[Foreign Exchange] Reflecting on the "Major Shift to Yen Depreciation" in July 2024 | Yoshida Tsune's Forex Daily | Moneyクリ Monex Securities Investment Information and Media Useful for Money

The third intervention triggered a rapid Rebound of the yen.

In July 2024, the USD/JPY shifted towards a stronger yen following the third intervention to sell dollars. Less than a month later, on August 5, 2024, the global stock market crash dubbed "Reiwa's Black Monday" saw the USD drop to 141 yen, marking a significant depreciation of the dollar and appreciation of the yen. In just under a month, there was a drastic drop of about 20 yen in the USD/JPY exchange rate (see Figure 1). Why did the persistent depreciation of the yen, which had been considered an "endless yen depreciation" or "eternal yen depreciation" in response to Japan's economic decline, suddenly turn into a rapid appreciation of the yen?

[Chart 1] USD/JPY Weekly Chart (January 2024 - ) Source: Manex Trader FX At that time, the U.S. Treasury Secretary, Janet Yellen, repeatedly stated that "intervention should be rare." This was seen as a restraint on U.S. government intervention, and the market believed that Japan could no longer intervene.

That was likely the biggest motivation for reigniting the yen's depreciation to 161 yen in this situation. However, the Japanese authorities implemented a dollar-selling intervention, which became the trigger for the sudden rebound of the yen.

The Bubble of "Too Rational" Yen Selling Due to Significant Interest Rate Differentials and Yen Underperformance

The rise of the US dollar to 161 yen by July 2024 occurred in the face of a narrowing of the interest rate differential between Japan and the United States (with the US dollar being dominant and the yen being weak) (see Chart 2).

[Figure 2] USD/JPY and the Japan-U.S. 10-Year Bond Yield Spread (2024) Source: Created by Monex Securities from Refinitiv data What justified the extremely wide divergence of the yen's depreciation from the interest rate differential was the speculative selling of the yen by market players, which, although it has decreased, has expanded to an unprecedented scale, given the still significantly large interest rate differential against the yen (see Figure 3).

[Figure 3] CFTC Statistics on Speculative Yen Positions and the Japan-U.S. Policy Interest Rate Differential (2005 - ) Source: Created by Monex Securities from Refinitiv data. Given the significant interest rate differential and the weakness of the yen, the authorities may have found it impossible to intervene in buying yen, which they have felt to be the "greatest threat" as it could lead to a rapid appreciation of the yen in the short term. Therefore, the market's beginning of a "runaway" may have been the true nature of the movement that was referred to as the "historical depreciation of the yen" up to 161 yen.

However, did the U.S. Treasury really oppose Japan's intervention? When I asked one of the officials about this later, the explanation was, "It wasn't that we told them not to intervene. Secretary of the Treasury Yellen, who has an academic disposition, was simply discussing the fundamental issues." In fact, Japanese authorities went ahead with their third intervention, which ultimately served as a catalyst to rebound the movement that had resulted in a historically weak yen.

The Nearly 20 Yen Crash of the Dollar/Yen in Less Than a Month Proves the "Yen-Selling Bubble"

However, it was said that this third intervention, which was not meant to be a "do not do it," might have been seen as "overdoing it" by some both domestically and internationally. As a result, shortly after this, at the end of July 2024, the Bank of Japan raised interest rates, and from September 2024, the Federal Reserve began to lower interest rates. Due to the changes in the monetary policies of Japan and the United States, the timing for the inevitable strengthening of the US dollar and weakening of the yen was approaching, so there was likely a perspective that that intervention was unnecessary.

However, from my perspective watching the USD/JPY during that turmoil, if the situation continued where interventions were not made relying on changes in the monetary policies of Japan and the United States to end the depreciation of the yen, it wouldn't have been surprising for the USD to rise to around 165 to 170 yen. Whether the historical end of the yen's depreciation was at 161 yen or 170 yen, what influenced that was likely the "third intervention" that took place on July 11, 2024, amid criticism of it being "excessive."

And when the yen depreciation reversed from 161 yen, a rapid yen appreciation of about 20 yen occurred in a short period of less than a month. Such abnormal price movements could only be a result of a "bubble burst." The intervention was merely a trigger. It can be said that the rapid and abnormal yen appreciation that spread was proof that the yen depreciation down to 161 yen was caused by a yen selling "bubble."