ROI-Yen intervention risk still looms large: McGeever

By Jamie McGeever

ORLANDO, Florida, Jan 27 (Reuters) - The yen has surged nearly 4% since Friday without Japanese authorities spending a single cent in the foreign exchange market. If Tokyo wants to capitalize on this move, now is the time to strike.

The Japanese currency's JPY= leap to a two-and-a-half-month high near 153.00 per dollar on Tuesday came after the New York Federal Reserve conducted rate checks on dollar/yen on Friday at the behest of Tokyo. Spooked traders took this as a sign that coordinated U.S.-Japanese intervention to strengthen the yen might be imminent.

That hasn't happened yet. And there are good reasons why joint action – a rare event - is unlikely at this juncture.

But unilateral intervention from Tokyo, with tacit approval from Washington, cannot be dismissed out of hand.

For starters, recent history shows Japan isn't shy about entering the FX market, often in large size. Bouts of yen-buying intervention in 2022 and 2024 saw Tokyo spend around $160 billion in total. And some of those actions occurred when the yen was stronger than it is now.

What's more, now may be an opportune time to act from a short-term political perspective. Prime Minister Sanae Takaichi probably won't want the yen languishing at historical lows near 160 per dollar when the country votes in the snap election she called for February 8.

Analysts say the yen's recent weakness and simultaneous collapse in the Japanese government bond market can be traced directly to Takaichi's pledges to increase spending and cut taxes, most notably a proposed two-year suspension of the 8% sales tax.

Perhaps most importantly, the market is primed for intervention. Traders are on the defensive, nerves are high, and speculative positioning is less of a barrier to further declines in dollar/yen.

Commodity Futures Trading Commission data shows that hedge funds have started 2026 with a net "short" yen position. It's not large by historical standards, but these funds were net "long" yen all last year. More yen appreciation now could force these funds to flip back, providing a strong tailwind for any government action.

In sum, if Tokyo wants the yen's move away from the 160 per dollar area to gain momentum, it can make it happen.

YEN'S LONG-TERM MISALIGNMENT

These are the potential reasons to justify intervention in the near term, but the picture is even clearer when zooming out. The yen is extremely weak on a historical basis and significantly undervalued on a purchasing power parity (PPP) basis.

The yen's real effective exchange rate (REER), a measure of its value accounting for inflation differences between countries, is near its lowest ever. It has sunk 30% in the last five years, and has failed to benefit from the hugely positive swing in U.S.-Japan bond yield spreads since 2023.

To be sure, Japan still has deeply negative inflation-adjusted, or 'real', interest rates, making it an outlier among major economies. But the Bank of Japan is raising rates, albeit slowly, and the 'real' rate gap between the U.S. and Japan is the narrowest in three years.

That should justify a stronger yen. Naomi Fink, chief global strategist at Amova Asset Management, estimates that dollar/yen's short-term 'fair value' based on relative yield differentials is in the 147-149 yen region. She puts dollar/yen's long-term 'fair value' on a PPP basis at around 100 yen.

But for it to return to this level, far more supportive monetary policy would be required. "The BOJ needs to 'join the crowd' in G7 rate setting (i.e., set a positive real rate) if it wants to lift JPY on a sustained basis," economist Phil Suttle wrote on Monday.

Ultimately, politics may be the biggest factor. Tokyo wants a stronger yen and Washington wants a weaker dollar. As long as that is the case, and with the dollar/yen exchange rate at a historically high level, the threat of intervention will continue to loom large.

(The opinions expressed here are those of the author, a columnist for Reuters)

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