Key Takeaways:
The first joint US-Japan yen intervention in 15 years bought time, but economist Fu Peng argues it cannot fix what a slow BOJ rate path has broken.
US and Japan bought yen jointly July 31, the first operation since 2011, after USD/JPY breached 160. Economist Fu Peng says the move masks Japan's slow rate hike pace, the root cause of the yen's persistent weakness.
"The root cause is only one: Japan's rate hike pace is too slow," Fu Peng, a prominent economist and author of the Fu Peng Shuo column on Wall Street CN, said. "The intervention treats the symptoms, not the cause."
The joint operation marked the first yen-buying intervention since 1998 and the first US-Japan coordinated effort since the 2011 Tohoku earthquake. USD/JPY traded at 158.98 on Friday, down from above 160 before the intervention. ING's Behavioral Equilibrium Exchange Rate model shows the yen remains about 20 percent undervalued against the dollar through 2026.
The intervention's durability hinges on whether the BOJ accelerates its tightening path. Markets price roughly a 75 percent chance of a BOJ hike in September, with the next policy meeting scheduled for Oct. 30. ING's base case sees USD/JPY at 158 by end-2026 and 152 by end-2027, implying gradual yen appreciation unless Tokyo's structural reforms take hold.
Fu Peng, who has held Japanese equities for nearly a decade, argues the stock market's internal structure reveals a K-shaped transformation: legacy sectors overlapping with China's manufacturing base — notably autos — are declining, while finance, technology, and semiconductors are rising alongside domestic demand. He compares this to the US in the 1980s and 1990s, when American autos declined while computers, software, and financial services rose.
"Japan's stock market is real. Inside it is a K-shaped structure: the old is being eliminated, the new is rising," Fu Peng said. "It pursues structure, not breadth."
Treasury Secretary Scott Bessent has committed significant political capital to the intervention, the first joint yen-buying exercise since the 1998 Asian financial crisis, according to ING Global Head of Markets Chris Turner. Bessent's confidence stems from a conviction that the yen is undervalued and expectations of yen-supportive policy shifts in Japan, including a faster pace of BOJ rate hikes.
Turner cited two precedents where central bank policy shifts changed currency trends: Sweden's Riksbank hedging its FX reserves in June 2023 when it viewed the krona as undervalued, and Mexico's Banxico unwinding a $7.5 billion short USD/MXN forward position in September 2023. Both currencies held their levels afterward, Turner said.
Durable yen appreciation requires Japanese capital to stay onshore, Turner said, tying the currency's path to Tokyo's new growth strategy announced in July to deploy 370 trillion yen ($2.3 trillion) of public-private investment by 2040. Bank of Korea research shows Japan retains 46 percent of overseas investment income offshore as reinvested earnings, versus 40 percent for Korea, 28 percent for Germany, and 18 percent for Taiwan.
"Having made his name with speculative bets on exchange rates, it looks like Bessent is betting the yen will appreciate," Turner said, adding that lasting appreciation depends on higher domestic returns, stronger growth, and a supportive BOJ policy path.
Fu Peng traces the yen's weakness to structural shifts that began in 2011-2012, when Japan's long-term economic transformation started. He argues exchange rates carry different meanings at different development stages: early development needs depreciation, later stages need appreciation, and a final depreciation can accompany economic transition.
"Don't look at this with ideology or emotion," Fu Peng said. "Many people think a weak currency means a weak economy. But look at China — the yuan depreciated from 4 to 8.26 per dollar while the economy grew stronger."
The yen's path forward depends on whether the BOJ delivers on market expectations. If September's hike materializes and Tokyo's structural reforms retain capital onshore, the intervention could mark a turning point. If the BOJ's pace remains slow, the yen's weakness will persist regardless of how many times policymakers intervene.
This article is for informational purposes only and does not constitute investment advice.
