BlackRock: Intervention cannot save the yen, Bank of Japan must reveal its hawkish stance

According to reports from Zhihu Finance APP, Rick Rieder, BlackRock's Global Chief Investment Officer of Fixed Income, stated that government intervention alone is far from sufficient to support the yen's exchange rate; the Bank of Japan must deliver clear hawkish policy signals.

This week, the yen-dollar exchange rate once again approached the 160 mark, nearing its lowest level in almost forty years. This movement has partly erased the gains resulting from the joint intervention by US and Japanese authorities and has also highlighted the limitations of intervention when interest rate differentials remain clearly in favor of the US dollar.

On Wednesday, Rieder pointed out that foreign exchange intervention “is not the most sustainable path for a yen rebound.” He further said, “I have witnessed many interventions—you need to keep applying immense firepower. But the key is that monetary policy must convince the market you will raise rates and show a hawkish stance when necessary. I think the market needs to see that from Japan.”

Currently, Japan’s benchmark interest rate stands at only 1%, while the Federal Reserve's federal funds rate target range is 3.5% to 3.75%, creating a significant gap between the two. Facing this interest rate differential dilemma, market participants are generally pinning their hopes on the Bank of Japan adopting a tightening policy.

According to insiders, the government led by Japanese Prime Minister Sanae Takaichi supports the Bank of Japan’s recent interest rate hikes, with the next potential hike in September or October. Sources added that the Bank of Japan is concerned that yen depreciation will drive up prices, and the Japanese government also wants to enhance the effects of the recent US-Japan coordinated intervention in the foreign exchange market. These factors have prompted both sides to believe a rate hike is necessary in the near term. Notably, as US CPI and PPI data cool and oil prices fall, markets are no longer fully pricing in further rate hikes from the Federal Reserve this year.

The last time the Bank of Japan raised interest rates was in June, when it hiked by 25 basis points to 1%. Rieder expects the Bank of Japan could raise rates again in September but does not rule out the possibility of postponing the move until December. He said, “This is critical for market stability.”

Rate Hike Becomes ‘The Only Cure’

Beyond intervention, the Bank of Japan has become the key variable determining whether yen stability can be sustained.

Katsutoshi Inadome, Senior Strategist at Sumitomo Mitsui Trust Asset Management, said bluntly, “In the short term, the only cure for a weak yen is a Bank of Japan rate hike.”

Rinto Maruyama, Senior Strategist for Foreign Exchange and Rates at SMBC Nikko Securities, warned that current bond yields and swap rates have fully priced in expectations for a September rate hike. If the Bank of Japan delays again, it will be seen by the market as “policy credibility lost.” He further noted that if this happens, market participants will lose confidence in the Bank of Japan’s willingness to raise rates going forward, causing the yen to resume its decline, and long-term bond yields may rise further as inflation concerns intensify.

Meanwhile, Masayuki Nakajima, Senior Strategist at Mizuho Bank, noted that the market focus has shifted from “whether rates will be raised in September” to “the pace of tightening after the hike.”

Changes in speculative positions have also confirmed this shift in expectations. Data from the US Commodity Futures Trading Commission (CFTC) for the week ending August 4 shows that, after coordinated moves by US and Japanese officials helped stabilize the yen, hedge funds have halved their yen short positions. This is in sharp contrast to the end of June, when these funds held the largest net short positions since 2007.

As of press time, the yen exchange rate was approximately 159.48 yen per US dollar.