Japan Week Ahead: Markets Eye Impact of Japan-US Joint Action to Stop Yen from Falling Further as Rising Bond Yields Could Hurt Economic Growth while Inflation Persists 

By Max Sato

(MaceNews) – Market participants are watching whether Japan’s currency intervention last week will have any lasting effect on keeping dollar bulls at bay amid concerns that rising long-term bond yields triggered by Tokyo’s large fiscal spending plans will spill over to boost borrowing costs in the United States.

Finance Minister Satsuki Katayama declined comment on whether the ministry stepped into the foreign exchange market to buy yen, telling reporters that Japanese officials are “always responding with a sense of urgency.” In recent trading the yen’s value has been drifting down toward ¥164, the lowest in nearly four decades, fueling fears that imports will become even more expensive.

A sudden slump in the dollar from above ¥163 to below ¥160 late on Thursday Tokyo time pointed to rounds of stealth intervention to buy yen, totaling ¥5 trillion to ¥6 trillion, according to news reports. The following day, the dollar picked up briefly but plunged again, this time more sharply to around ¥157.20, indicating further action by the MOF.

The ministry last acted in the forex market from late April to early May, when market conditions were choppy during Japan’s Golden Week holidays. MOF data later showed the massive campaign totaled a record ¥11.74 trillion in yen buying. At the time Katayama and her deputy had warned about imminent intervention. The dollar dipped toward ¥155 from ¥160 but the intervention lost its effect a month later. This time no hints were drop beforehand and there has been no official confirmation afterwards.

Forex traders seem to have taken the message more seriously on Friday as they saw signs that the U.S. Treasury Department is also behind the large-scale dollar selling. U.S. officials wish to keep a lid on bond yields and prevent higher borrowing costs from hurting the economy when they also need to watch rising inflationary pressures. In the Treasury market, 30-year yields surged above 5.25%, a 19-year high, and 10-year yields also rose to 4.73%, the highest since early 2025.

The Financial Times reported on Friday that Washington joined forces to prop up the value of the sinking yen in the forex market, the first such action to support Tokyo since June 1998, when Japan was reeling under the drag from the Asian financial crisis and non-performing loans at Japanese lenders. The last joint action in March 2011 was part of the G7 initiative to slow the yen’s surge in the aftermath of the massive earthquake and tsunami in northeastern Japan that triggered rumours that insurers needed to repatriate large sums of dollars for yen to pay for the damage.

The Federal Reserve Bank of New York undertook the unusual move of conducting a sale of euros to buy yen on behalf of the Treasury, the FT said, quoting unnamed sources who are familiar with the matter.

Reuters also reported on Friday that a photograph taken over the shoulder of U.S. Treasury Secretary Scott Bessent during President Donald Trump’s cabinet ​meeting at Camp David showed a note that is believed to have been written by Bessent. It said, “To Do, Buy Japanese Yen (JPY) $5 – 10 bil,” which would be ¥788 billion to ¥1.57 trillion.

For its part, the Ministry of Finance appears to be telling intervention skeptics that it has ample ammunition for dollar-selling forex interventions. Normally, Tokyo uses its foreign reserves to try to stop the dollar from rising further, which means there is a limit to how much it can spend unlike its yen-buying operations that are backed by an unlimited supply of the Japanese currency.     

“Japan’s monetary authorities have a broad range of tools available to address market liquidity needs,” the MOF’s post on social media said. “These include potential access, as appropriate, to the Federal Reserve’s standing Foreign and International Monetary Authorities (FIMA) Repo Facility, which can provide temporary U.S. dollar liquidity against U.S. Treasury securities. We remain prepared to use available tools as necessary to support orderly market functioning.”

The MOF is not receiving much help from the Bank of Japan at this point as the bank is no hurry to raise interest rates further. In theory, higher interest rates would support the yen but given that U.S. interest rates are much higher, a slight rise in the BOJ’s policy rate would not change the generally strong dollar sentiment.

At this latest meeting on July 30-31, the BOJ’s nine-member board decided to leave the target for the overnight interest rate at 1% in an 8 to 1 vote as the bank is still monitoring the impact of its fifth hike in the current cycle that was conducted last month. The board again vowed to “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation. Underlying inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative, it noted.

On the economic date front, in light of resilient exports and industrial production in the second quarter, economists are now forecasting that Japan’s economic growth will accelerate slightly from the first quarter. The tentative median forecast for the Q2 gross domestic product due on Aug. 17 is a solid 0.6% rise on quarter, or an annualized 2.3%, compared to the Q1 growth rates of 0.5% and 1.8%. In early July, before seeing various June economic indicators, economists had predicted that the economic growth would lose some momentum in April-June.

The Japanese auto industry has weathered the impact of high U.S. tariffs while global demand for computer chips and non-ferrous metals remains strong. Domestically, firms are digitizing operations to cope with labor shortages.

Consumers are also seen contributing to the Q2 growth, backed by substantial nominal wage hikes by many firms in the third straight year and on-and-off subsidies to help cap fuel prices and utility bills. There is also a temporary boost to sales of air conditioners before the government applies tighter energy-saving standards in April 2027. The elimination of a special environmental tax on vehicle purchases in March this year has been helping the recent pick-up in demand for automobiles.

Looking ahead, however, the economy is likely to feel some pain arising from last week’s 7.1-magnitude earthquake that shook Kumamoto Prefecture in southwestern Japan, killing 36 people and injuring many more. The powerful quake flattened many homes, caused roads to plunge and warp and cut off electricity and water supply. Aftershocks are lingering and the disaster could cause a supply chain disruption on a national level for growth-leading industries and dent consumer and business sentiment.

Friday, Aug. 7
0830 JST (2330 GMT/1930 EDT Thursday, Aug. 6) The Ministry of Internal Affairs and Communications releases June, Q2 household spending.
Mace News median forecasts: +0.1% y/y (range: -2.5% to +3.1%) vs. May -0.4%; -3.7% m/m (range: -5.0% to -0.7%) vs. May +3.7%

Japan’s real average household spending is expected to be nearly flat, up just 0.1% on the year, after falling in the previous six months, as consumers remain cautiously resilient amid elevated costs of food and other essentials. Demand for air conditioners, fans and other seasonal goods remains strong amid hot and humid weather while spending on vehicles and eating out has also been picking up.

The depreciation of the yen has made imports more expensive, continued wage hikes amid labor shortages have prompted many firms to pass higher costs onto retail prices and the Mideast conflict has boosted transportation and packaging costs.

From a month earlier, real average expenditures by households with two or more people are forecast to slump 3.7%, giving up the hefty 3.7% gain in May that sent the seasonally adjusted expenditures index to a 12-month high of 101.7.

On the supply side, retail sales rose 0.5% on the year in June, slowing sharply from a 5.1% rise in May, which was the highest pace since 5.4% in November 2023. Demand for vehicles continued to pick up while typhoon weather and lower temperatures compared to a year earlier dampened sales of all other categories including clothing and appliances such as air conditioners. Government subsidies have put a lid on retail prices of gasoline and diesel, exerting downward pressure on fuel sales.

Industry data showed department store sales posted their sixth straight year-on-year rise June, up 2.3%, but the pace of increase decelerated from 8.3% in May and 5.2% in April in light of rainy and typhoon weather. There was also one less Sundays (four) compared to June last year, which also led sales to domestic customers to mark their first drop in 11 months (-0.2%).

On the upside, the weak yen kept sales to visitors from overseas above year-earlier levels for the fourth consecutive month, up 29.8%, following a 16.7% gain in May. Solid spending by those from Southeast Asia and Europe continue. Even spending by Chinese shoppers rose about 16% to record its first year-on-year increase in seven months, although the number of those from China was still down 25% as many of them are bypassing Japan at the request of Beijing over bilateral diplomatic rows.

Friday, Aug. 7
1400 JST (0500 GMT/0100 EDT Friday, Aug. 7) The Bank of Japan releases June consumption activity index. The supply-side indicator, which has a close correlation with revised GDP data, rose a real 0.6% on the month in May on a travel balance adjusted basis after rebounding 1.7% in April and falling 0.7% in March. The index in the April-May period posted a 1.6% rise on the January-March quarter, when it gained 0.6%.