Japan likely spent up to $35bn intervening to support the yen, but Barclays warns depreciation pressure will persist over the medium term as Iran war energy costs weigh.
Summary:
- The dollar had its largest weekly loss against the yen since February after Japan was reported to have intervened in foreign exchange markets, according to Reuters
- Bank of Japan data indicated authorities may have deployed up to 5.48 trillion yen, equivalent to approximately $35 billion, during the intervention, just below the $36.8 billion spent in July 2024, per Reuters
- Japan's top currency diplomat Atsushi Mimura warned that speculative positions remained evident in the market following the operation, per Reuters
- Barclays analysts said the yen's recovery from past interventions has typically reversed within two days, and flagged a risk of further interventions if dollar-yen rebounds sharply toward 160, per Barclays research note
- Barclays said persistent depreciation pressure on the yen is likely to continue over the medium to long term, citing fragile foreign exchange supply-demand conditions and inflation risk premia, per Barclays research note
- Barclays placed its fair value estimate for dollar-yen at 148 but said a degree of risk premium relative to that level is likely to persist, per Barclays research note
- The BOJ signalled it could begin raising rates as soon as June to address inflationary pressure from higher imported energy costs linked to the Iran war, according to Reuters; other analysts noted that Fed rate cut expectations have largely evaporated, limiting the scope for sustained yen strength
- Barclays also flagged concerns over Japan's fiscal position, noting that increased defence spending and Prime Minister Takaichi's reflationist BOJ board appointments had raised questions about policy discipline, per Barclays research note
Japan moved to defend its currency last week, with Bank of Japan data pointing to an intervention of up to 5.48 trillion yen, equivalent to approximately $35 billion, deployed in a single operation to halt a slide in the yen that authorities had grown increasingly uncomfortable with. The dollar fell against the yen before recovering somewhat, and Japan's top currency diplomat warned that speculative positions in the market had not been cleared, signalling that further action could follow.
The intervention pushed the dollar toward its largest weekly loss against the yen since February, but Barclays struck a cautious note on whether the move would hold. The bank's analysts pointed out that in past episodes, the yen has tended to reverse lower against the dollar within roughly two days of intervention, returning to pre-intervention levels and in some cases prompting authorities to act again. Barclays flagged a risk of additional interventions if dollar-yen rebounds sharply toward 160, noting that previous multi-day intervention campaigns were not always triggered by a return to the original level but by the speed of the rebound.
Over the medium to long term, Barclays said depreciation pressure on the yen is likely to persist, driven by what the bank described as fragile foreign exchange supply-demand conditions and elevated inflation risk premia. The firm placed its fair value estimate for the dollar-yen pair at 148, a level that implies significant overvaluation at current rates, but acknowledged that a degree of risk premium relative to that estimate is likely to remain in place.
The structural forces bearing down on the yen are well established. Wide interest rate differentials between the United States and Japan have kept the currency under sustained pressure, and that gap has been compounded by the Iran war, which has pushed energy import costs sharply higher for Japan, one of the world's largest buyers of oil and gas. The BOJ has signalled it may respond by raising rates as early as June to address the inflationary consequences of higher imported energy costs. Other analysts noted, however, that expectations for Fed rate cuts have largely evaporated in the same period, meaning any convergence of US-Japan policy rates is already largely priced into the market and offers limited downward impulse for the dollar.
Barclays also raised longer-term concerns about Japan's fiscal trajectory, noting that increased defence spending commitments and questions about the policy orientation of BOJ board appointments made under Prime Minister Takaichi had introduced additional uncertainty. The bank warned these factors could contribute to renewed yen weakness, higher Japanese government bond term premia and rising inflation expectations over time.
Japan is heading into its Golden Week holiday period, which analysts noted was the same window during which authorities intervened in 2024. The combination of thinner liquidity and an already volatile dollar-yen rate keeps the risk of further intervention elevated in the near term, even as the medium-term picture remains weighted against a sustained yen recovery.
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The Iran war's role in driving higher energy import costs is now a direct factor in yen weakness, reinforcing the dollar's strength at a moment when the Fed has effectively ruled out near-term cuts. Japan's willingness to deploy $35 billion in a single intervention underscores the seriousness of the currency's slide, but the structural drivers, wide US-Japan rate differentials compounded by elevated oil prices, remain firmly in place.
Barclays' fair value estimate of 148 for dollar-yen suggests significant overvaluation at current levels, but the firm's own medium-term outlook acknowledges that risk premia will keep the pair elevated well above that level. For energy markets, a persistently weak yen raises import costs further for one of the world's largest oil and gas buyers, adding another layer of demand-side complexity to an already disrupted supply picture.
