US Dollar/Japanese Yen FX Spot Rate

Bank of Japan Deputy Governor Ryozo Himino said today that the BOJ should proceed with raising its policy interest rate, citing upside risks to inflation, ahead of next month's monetary policy meeting. He stated, "We should place more importance on upside risks to prices than in the past," during a speech in Saitama Prefecture, near Tokyo. He noted that rising crude oil prices due to Middle East conflicts, higher semiconductor prices driven by global AI-related demand, and the recent yen depreciation are expected to push up prices. Financial markets are watching whether the BOJ will raise rates in September, after having raised them to 1.0%, the highest level in 31 years, in June. Market expectations for a September hike have increased following signals from BOJ Governor Kazuo Ueda about "accelerating the pace of rate hikes" if necessary, along with warnings about upside risks to inflation. These remarks suggest the BOJ may raise rates sooner than its usual cycle of every six months. Additionally, the joint Japan-U.S. intervention to buy yen on July 31 has also fueled expectations of a September rate hike, as such measures could help slow the yen's depreciation.

Takahide Kiuchi, a former Bank of Japan board member, said the BOJ is likely to raise interest rates at its September policy meeting, moving up his forecast from December. In an interview on the 26th, Kiuchi pointed out that given Governor Kazuo Ueda's explanations at the previous meeting and the prominence of hawkish opinions in the "Summary of Opinions," the likelihood of a September hike is high, and that "pressure from the Ishiba administration has weakened," which also supports a rate increase. The BOJ kept its policy rate at around 1.0% at the July meeting, but Governor Ueda expressed caution about upside risks to prices and mentioned the possibility of accelerating the pace of hikes. Kiuchi expects a hike to 1.5% in January next year and 1.75% in October following the September move. In the market, interest rate swaps are pricing in about a 90% chance of a hike to 1.25% in September, with a hike by October almost fully priced in.

MUFG's Derek Halpenny notes that the Japanese Yen is firmer versus most G10 currencies as markets increasingly price a Bank of Japan rate hike in September. This expectation is providing support for the yen against the US Dollar, according to the bank's analysis.

US Treasury Secretary Bessent's announcement of a US Treasury buyback temporarily lowered interest rates and strengthened the yen, but market reaction was limited, and disappointment over the lack of specifics in the fiscal consolidation plan could trigger a triple decline in Japan: falling US bonds, stocks, and the dollar. The buyback is scheduled from September 9 to November 4, with the per-operation cap raised to between $2 billion and $4 billion (approximately 634 billion yen), but long-term yields have returned to pre-announcement levels. Bessent has said he will soon unveil a fiscal consolidation plan, but without concrete measures, it risks disappointing markets and leading to a triple decline. This week, events include a press conference by Bank of Japan Deputy Governor Ryozo Himino, a speech by Federal Reserve Chair Warsh at the Jackson Hole symposium, and the G20 Finance Ministers and Central Bank Governors meeting, which could destabilize markets from September to October.

The Bank of Japan (BOJ) has announced that board member Naoki Tamura will represent the central bank at the Federal Reserve's annual symposium in Jackson Hole, Wyoming, this week, replacing Governor Kazuo Ueda, who is unable to attend due to other commitments. The BOJ stated that Tamura will not give interviews or hold press conferences during the meeting. It is unusual for the BOJ to send a board member to Jackson Hole, as the central bank is typically represented by the governor or one of the two deputy governors. Tamura, a former commercial banker, is considered a hawkish board member and has expressed support for raising interest rates every two to three months to address inflation risks. Investors are also watching for the first speech by new Fed Chair Kevin Warsh at Jackson Hole, with analysts suggesting his stance on U.S. monetary policy could affect the yen and bond yields, influencing the BOJ's policy decisions. Ueda's absence has also led markets to focus on whether he will attend the G20 finance leaders' meeting hosted by the U.S. in Asheville, North Carolina, next week. Although the BOJ has not confirmed this, U.S. Treasury Secretary Scott Bessent has said he looks forward to meeting the BOJ governor at the G20. Meanwhile, investors are assessing signals from BOJ policymakers that the central bank may accelerate interest rate hikes to address rising inflation risks. Cooperation between the U.S. and Japan on managing the yen, along with Bessent's stance, has led markets to almost fully price in a BOJ rate hike at its meeting on September 17-18, following the last increase in June. A survey of economists shows most expect the BOJ to raise its policy rate to 1.25% from 1% at the September meeting. BOJ Deputy Governor Ryozo Himino is scheduled to deliver a speech and hold a press conference on Thursday (August 27), which could provide further signals on the possibility of a rate hike next month.

The Ministry of Finance has requested a record-high debt servicing cost in its budget request for fiscal 2027, and the total budget requests from all ministries are expected to exceed 1,300 trillion yen for the first time. Interest payments are set to reach a record 16.5888 trillion yen, up about 27% from the initial budget for fiscal 2026, while debt redemption costs are 20.0025 trillion yen, bringing total debt servicing costs to 36.6386 trillion yen, a record high. This is driven by rising global interest rates and the Bank of Japan's rate hikes, with long-term interest rates briefly hitting 2.945%, a level not seen in about 30 years. The Ministry of Finance has assumed an interest rate of 3.8% for the budget, and the budget request, which Prime Minister Sanae Takaichi has positioned as the 'first year of responsible and aggressive fiscal policy,' appears to have no upper limit.

Japan's 10-year government bond yield touched 2.945%, its highest since September 1996, while the yen slipped back toward 159 per dollar. The 30-year yield hit 4.115% the same morning, and core inflation rose to 1.8% in July from 1.6% in June. Economists expect the Bank of Japan to lift its policy rate from 1% to 1.25% at its September 17-18 meeting. Bitcoin has ignored the stress, up 22% in seven days near $77,355, though analysts warn a yen surge could unwind carry trades as in August 2024.

ING analysts said the yen is around 20% undervalued against the dollar, a gap its fair-value model shows has persisted through 2026, as U.S. Treasury Secretary Scott Bessent backs the late-July joint U.S.-Japan intervention to succeed. ING Global Head of Markets Chris Turner said Bessent, a former hedge fund portfolio manager, will have committed significant political capital to the intervention, the first joint yen-buying exercise since the 1998 Asian financial crisis. Turner said 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 Bank of Japan rate hikes, with markets pricing roughly a 75% chance of a BOJ hike in September. ING FX strategist Francesco Pesole said the bank's Behavioural Equilibrium Exchange Rate model, which uses terms of trade, productivity, current account balances and government spending, has shown USD/JPY overvaluation above 20% throughout 2026. Turner cited two precedents where central bank signalling shifted 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 to signal the peso was too strong, with both currencies holding their levels afterward. Turner said durable yen appreciation requires Japanese capital to stay onshore, 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. He cited Bank of Korea research showing Japan retains 46% of overseas investment income offshore as reinvested earnings, versus 40% for Korea, 28% for Germany and 18% for Taiwan. Turner said further structural moves could include adding Japanese government bonds to NISA accounts or a reallocation by Japan's Government Pension Investment Fund toward domestic assets, potentially timed to the BOJ's Oct. 30 meeting, though he called such changes speculative. ING's base case sees USD/JPY at 158 by the end of 2026 and 152 by the end of 2027.

Citi strategists say recent coordinated intervention by the United States and Japan signals an informal currency alliance linking foreign-exchange policy with the countries' wider economic and national-security relationship. Japan's Vice Finance Minister for International Affairs Atsushi Mimura described the latest intervention as the culmination of that alliance, which Citi views as policy coordination that may also support Japan's $550 billion U.S. investment programme. The bank does not believe Treasury Secretary Scott Bessent is implementing a proposed Mar-a-Lago accord, though dollar-selling intervention through the Federal Reserve's Foreign and International Monetary Authorities facility was one element of that framework. Citi said Bessent appears concerned that prolonged yen weakness could recreate conditions seen before the Asian currency crisis in the late 1990s, and President Donald Trump's description of the intervention as a signal of friendship suggests Washington supported the action. The move may also send a warning to Japanese Prime Minister Sanae Takaichi, whose reflationary policies could place renewed downward pressure on the yen, and Citi believes Washington wants Tokyo to moderate that stance. The bank drew a comparison with 1998, when the U.S. initially refused to participate in coordinated intervention as the yen weakened, and USD/JPY later plunged from ¥147 to ¥108 within six months after the collapse of Long-Term Capital Management disrupted financial markets. Another unusual feature of the latest action was U.S. intervention to sell euros and buy yen, which Citi views as a temporary shift by the Treasury's Exchange Stabilization Fund from a historically expensive euro into an undervalued yen. Japan could take similar action if EUR/JPY rises toward ¥185 to ¥186, and European authorities may tolerate limited intervention following Washington's move. USD/JPY is expected to remain the main focus, and intervention could also seek to push EUR/JPY below its recent low near ¥180, at least temporarily. Markets will watch the Jackson Hole symposium from August 27 to 29, followed by G7 and G20 finance meetings in Asheville on August 31 and September 1, for further policy signals.

Treasury Secretary Scott Bessent hinted the Treasury may have asymmetric information behind its recent yen purchase and expanded long-dated bond buybacks. Bessent said on CNBC that people have bad information while he has asymmetric information, asking why the Treasury would join Japan's intervention and pursue a Treasury twist if it did not know something the market does not. Analysts remain skeptical, with UBS's Paul Donovan calling the yen's drift back to fair value hardly surprising and BNP Paribas warning the buyback measures will struggle to offset declining Fed credibility or rising rate expectations. Bessent said further bond action will hinge on market reaction and that the Treasury is trying to keep the market in equilibrium during a thin August period.

Senior foreign exchange officials from South Korea and Japan met in Tokyo on Friday and pledged to strengthen cooperation and maintain close contact amid volatility in Asian currency markets. The meeting came after joint currency intervention by the United States and Japan in late July helped support both the yen and the won. South Korea's Ministry of Economy and Finance said Deputy Minister Moon Ji-sung met with Japan's Vice Finance Minister for International Affairs Atsushi Mimura. The two sides exchanged views on the latest global economic and financial market conditions, as well as each country's policy responses. They also discussed issues within multilateral cooperation frameworks, including ASEAN+3 and the G20, and preparations for the 11th South Korea-Japan finance ministers' meeting, which Seoul will host. They agreed to maintain close contact at both working and senior levels. The talks marked the first high-level contact between the two countries since the events of July 31, when Japan and the United States jointly bought yen, just one day after Japanese authorities intervened in the market to support the currency. On that day, Moon said foreign exchange authorities from the United States, South Korea, and Japan were in close coordination, although he did not confirm whether South Korea also intervened. The moves pushed the yen and the won stronger in the same direction in late July. Since then, however, the two currencies have diverged, with the yen giving back some of its post-intervention gains while the won continued to strengthen to an 11-month high. The talks between Seoul and Tokyo therefore took place at a time when the two countries face different currency challenges but still need to coordinate policy closely amid global financial market volatility and movements in the US dollar.

Japan reported headline inflation for July rose 1.9% year on year, the highest level this year, supported by higher energy costs from the Iran war. Core inflation, which excludes fresh food prices but includes energy, came in at 1.8%, matching forecasts, while energy prices rose for the first time since November 2025 despite government price-support measures. The producer price index stood at 7.2% in July, and fresh food prices jumped 7% from 3.9% in June. Core inflation excluding fresh food and energy was 1.9%. Economists at State Street Investment Management said the figures reinforce the likelihood that the Bank of Japan will raise interest rates at its September meeting.

Foreign investors sold a net 1.28 trillion yen of two-year and five-year Japanese government bonds in July, the largest net selling since 2006, as the yen kept weakening and fueled expectations that the Bank of Japan may accelerate interest rate hikes. Data from the Japan Securities Dealers Association showed that foreign investors remained net buyers of long-term bonds with maturities over 10 years, worth 889.8 billion yen in the same month, indicating that selling was concentrated in short- to medium-term bonds, which are more sensitive to the interest rate outlook. The selling came as the yen hit its weakest level in nearly 40 years, prompting joint market intervention by Japan and the United States, while Bank of Japan Governor Kazuo Ueda signaled that policy could be adjusted at the September meeting.

Scott Bessent, the US Treasury Secretary, is being watched as one of the most interventionist Treasury chiefs in decades after pushing multiple measures to curb the rise in long-term US borrowing costs, from increasing buybacks of long-term bonds to intervening in the yen market with Japan. Most recently on Wednesday, the US Treasury announced it would at least double the buyback size for 10- to 30-year government bonds to help address pressure in the long-term bond market. Earlier, on July 31, Bessent oversaw the first official US purchase of yen in three decades, seen as helping reduce the need for Japan to sell its holdings of US government bonds to fund yen intervention. Mark Sobel, a former US Treasury official now at OMFIF, said Bessent clearly takes an activist approach in markets, reflecting his background in the hedge fund industry, and sees the key motivation as the government's concern over rising long-term bond yields. That concern has grown after the 10-year US Treasury yield, which Bessent has used as one of his key indicators, rose above the level before Donald Trump returned to the White House. The recent bond selling has not come from a sudden crisis but has built up from worries about inflation, the Federal Reserve's policy direction, and high budget deficits, keeping mortgage rates elevated and pressuring economic growth ahead of the November midterm elections. Bessent's approach also raises questions about the Treasury's traditional principle of conducting debt issuance in a steady and predictable way to avoid surprising markets. Gregory Faranello, head of US rates strategy and trading at AmeriVet Securities, said the announcement of larger bond buybacks runs counter to that principle, and the message the government is sending to markets is fairly clear: it wants to stop the rise in bond yields. The issue is even more notable because Bessent was previously one of the critics of former Treasury Secretary Janet Yellen's approach after the US government in 2023 adjusted debt issuance to help ease pressure on yields, with some Republicans at the time viewing it as a policy to help stimulate the economy before the election. However, a number of economists and investors question how sustainably market intervention can hold down borrowing costs, since the fundamental factors driving bond yields higher remain unresolved. With about two months left in fiscal 2026, the US has already accumulated a budget deficit of 1.8 trillion dollars, up 5 percent from a year earlier, with spending driven by Social Security, Medicare, Medicaid, and interest on the public debt, while defense spending is likely to rise and Republicans are considering further tax cuts. Robin Brooks, a senior fellow at the Brookings Institution, said that instead of fixing the underlying problem by reducing debt and controlling the budget deficit, the government is choosing an approach that looks like an attempt to manage the yield curve. Bessent's latest measures moved markets immediately, with the 10-year US Treasury yield falling about 6 basis points in afternoon trading in New York, while the 30-year yield fell almost 9 basis points. However, Guy Miller, chief strategist at Zurich Insurance, warned that this kind of intervention may have the power to move markets for a while but cannot continue indefinitely if the government does not address the fiscal policy problems that are the root cause. Meanwhile, Peter Boockvar, chief investment officer at Onepoint Bfg, concluded that Bessent is opening a fight on two enormous markets at once: the US government bond market and the foreign exchange market, which is a very challenging game.

The dollar weakened against major currencies after the US Treasury announced it would more than double the size of its Treasury buybacks to boost market liquidity. The dollar index fell 0.72% to 98.935, while the dollar slipped 0.71% to 1.166 against the euro and dropped 0.75% to 158.42 yen. The US Treasury will raise the maximum buyback size for 10-20 year and 20-30 year bonds from 2 billion dollars to at least 4 billion dollars, effective from September 9 through November 4. The yield on the 10-year US Treasury fell to 4.647%, and the 30-year yield dropped to 5.196%. Investors are watching for the minutes of the Federal Reserve's July meeting, due for release today.

George Saravelos, global head of FX research at Deutsche Bank, said in a report that last month's coordinated yen-buying intervention by Japan and the United States was not only ineffective but counterproductive, and that the yen might have risen further if authorities had not intervened at all. He noted that the United States signaled it would not tolerate direct sales of US Treasuries by encouraging Japanese authorities to use the Fed's FIMA repo facility, making it unlikely that Japan would borrow dollar funds at expensive FIMA rates to intervene, and raising the hurdle for additional intervention. He also said that US participation in the currency market was hardly an intervention in practice, and that changes in the weekly valuation of the SOMA balance sheet showed the Fed contributed nothing to the intervention, in contrast to past coordinated Japan-US interventions where costs were typically split evenly. He further expressed the view that Japan's economy has no debt problem, and that if the Bank of Japan begins raising rates at a pace typical of a normal central bank and the yen ceases to be a low-yielding currency, the yen will ultimately appreciate.

Macquarie says the US contribution to last month's joint yen intervention was mostly symbolic, estimating American authorities sold just $500 million of euro-yen on July 31. That compares with roughly $85 billion Japan is estimated to have sold in dollar-yen over July 30-31, making the US flow a drop in the ocean. Strategist Gareth Berry says the signaling effect was far more impactful than the size of the flow, and that the US Treasury and Fed still have $25.9 billion in euro-denominated reserves to deploy if the yen weakens again. The move marked Japan's biggest two-day intervention on record outside of October 2011.

Japan's former top currency diplomat Mitsuhiro Furusawa said the yen is 'clearly too weak' and that Tokyo and Washington could intervene again 'at any time' if the currency slides back toward levels seen before their joint intervention. Furusawa told Reuters that intervention alone only buys time, and that faster Bank of Japan rate hikes are needed to reverse the yen's downtrend, adding that most market players believe the BOJ will raise rates in September and that he thinks it should. He estimates the central bank would ultimately like to raise rates to 1.5% to 1.75%, after raising rates to a 31-year high of 1% in June. Last month, Japan's Ministry of Finance purchased yen in coordination with the U.S. Treasury to counter excessive volatility, and the yen fell past 163 to the dollar in July before the joint intervention lifted it back to around 155. Furusawa also said Prime Minister Sanae Takaichi's government shouldn't stand in the way of BOJ rate hikes, and Japan's debt-to-GDP ratio currently stands at 248.7%, the highest in the world.

MUFG analysts Derek Halpenny and Lee Hardman report that Japanese government bond yields are rising despite weaker-than-expected GDP, as markets focus on prospects for further Bank of Japan rate hikes. The analysts note that the yen is being supported against the US dollar by these expectations. The report highlights that bond market moves are diverging from the soft growth data, with investors pricing in additional BoJ tightening. This dynamic is seen as a key driver of yen strength in the near term.

Macro investor Jordi Visser said the U.S. government's yen intervention signals it is in financial trouble, and he sees Bitcoin as the top bet to capture the money printing that follows. Visser argued that AI will disrupt every business over the next five years, driving deflation and making Bitcoin's fixed scarcity attractive as a store of value. He pointed to Treasury Secretary Scott Bessent's call to raise the FIMA repo facility cap as a blueprint, where Japan collateralizes U.S. Treasury holdings at the Fed to get dollars and buy yen, effectively printing dollars. Visser compared Bitcoin's current price action to Micron Technology in early 2025, which broke out months later and rose eight to ten times within a year, and he is watching the 200-day moving average as a key clearing level. He also said Ethereum and Solana must participate for a true bull market, and he expects 2027 to be the year of consumer AI agents transacting on-chain, calling it the biggest catalyst crypto has ever seen.

Japan's economy grew 0.3% quarter-on-quarter in the second quarter of 2026, cooling from the first quarter's pace and missing market forecasts of 0.5%, according to preliminary data. Despite the GDP slowdown, June industrial production rose 1.9% month-on-month, beating the 1.3% flash estimate to mark a third straight month of growth and the strongest monthly surge since January. On a year-over-year basis, industrial output rebounded 4.9%, reversing May's 2.1% drop to post its sharpest annual expansion since September 2022. Following the release, the Nikkei 225 Index rose 0.4% toward 69,000, while the Japanese yen climbed to around 159 per dollar, recovering some of last week's losses.

Toyota, Honda and Nissan are facing risks from the impact of the Iran conflict and a stronger yen, after having benefited from the currency's weakness in the latest quarter. Toyota and Honda raised their full-year earnings forecasts, while Nissan posted its first profit in about two years. But the intervention by the US and Japanese finance ministries through yen buying in early August, a historic move after the yen tumbled to a 40-year low beyond 163 per dollar, has sent a warning signal. Analysts at Morningstar said a stronger yen will force automakers to choose between raising prices in overseas markets, which could lead to lost market share, or allowing operating profit to be squeezed by the reduced value of overseas earnings when converted back into yen. A 1% move in the yen affects Japanese automakers' operating profit by about 2%, and could reach about 4% for some companies. Meanwhile, the ongoing conflict in the Middle East could cause supply chain disruptions and higher costs, because the Strait of Hormuz and the Red Sea are key shipping routes for imports of aluminium and petrochemicals such as naphtha. The most significant negative pressure is a surge in raw material costs that intensifies amid the conflict.

The yield on Japan's 10-year government bond climbed to 2.93 percent, the highest level since 1996, amid fiscal concerns and growing expectations that the Bank of Japan may raise interest rates in the coming months. The 10-year yield rose as much as 0.055 percentage point, while the 30-year yield gained 0.05 percentage point to 4.06 percent, near its highest since its launch in 1999. Sources said the government of Prime Minister Sanae Takaichi supports a near-term rate hike by the BOJ, with the next move expected in September or October. Meanwhile, data released today showed Japan's economy grew more slowly than expected in the second quarter, with real gross domestic product expanding 1.1 percent compared with a market forecast of 2.0 percent.

The Bank of Japan is considering a rate hike at its monetary policy meeting on September 17 and 18, which would be its first in three months. The corporate goods price index rose 7.2 percent in July from a year earlier, reflecting persistent upward price pressure from AI-related demand and the weak yen. At the July meeting, some board members called for a faster pace of rate increases, and a hike at this meeting would signal an acceleration of the future tightening path. Long-term interest rates climbed to 2.9 percent in July, the highest in about 30 years, and the impact of faster rate hikes on market rate expectations will be a key focus.

Europe is facing its fifth heatwave of this summer, expected to peak on Thursday, August 13, amid extreme weather that is straining public health systems and energy networks across the region, while the United Kingdom is on track for its hottest summer on record. The scorching conditions are driven by successive high-pressure systems, or heat domes, blanketing the region, and are also disrupting freight transport on some major rivers. In financial markets, global stocks climbed near record highs after US inflation data came in cooler than expected, easing concerns that the Federal Reserve would raise interest rates in the near term. The yen strengthened after the Japanese government signaled support for the Bank of Japan to raise rates sooner, with the next hike possibly coming in September or October. West Texas Intermediate crude traded around 83 dollars a barrel, snapping a six-day winning streak. On the geopolitical front, the administration of President Donald Trump is stepping up economic pressure on Iran, including successive rounds of additional economic sanctions and maritime interdiction measures aimed at curbing Iranian oil exports. The UK government is planning legislation to regulate the use of AI in gene synthesis, amid concerns that the absence of global oversight could allow malicious actors to use the technology to create synthetic DNA that might lead to the development of biological weapons. In tech stocks, Lenovo surged as much as 22 percent in Hong Kong to a record high after reporting quarterly revenue up 43 percent, beating market expectations on AI-related demand. In contrast, Cerebras fell in after-hours trading after hardware revenue declined, while Cisco slipped as analysts viewed the company's AI sales outlook as highly cautious. Another focus is US-Japan cooperation on developing rare earth deposits beneath the seabed near Minamitorishima Island, more than 1,000 miles southeast of Tokyo, with estimates suggesting the resources could meet industrial demand for centuries and help both countries build a complete rare earth supply chain, reducing reliance on China for strategically important minerals.

Goldman Sachs estimates that Japan still has enough capacity to intervene in the foreign exchange market to support the yen several more times, following the historic intervention in July. Japan holds around $1 trillion in US dollar reserves and can also access the Federal Reserve's FIMA Repo Facility to add liquidity for such operations. Karen Fishman, a strategist at Goldman Sachs Research, said that of Japan's roughly $1 trillion in dollar reserves, about $200 billion is in cash or cash equivalents, close to the amount that may have been used in the July intervention. Goldman Sachs therefore assesses that Japan has enough ready funds to carry out yen-buying operations on a similar scale about two more times, even though in practice Tokyo is unlikely to use all of that money. Japan and the United States intervened jointly in late July after the yen weakened toward 164 per dollar, near its lowest level in four decades, marking the first time since 1998 that the US joined Japan to support the yen. In the first two days of the July operation, Japan may have spent as much as $85 billion, making it the largest two-day currency intervention in Japan's history, excluding the action in October 2011 after the Fukushima disaster. After the intervention, the yen strengthened through its 200-day moving average around 158 per dollar, but that strength has begun to fade. The yen has recently weakened back toward the key level of 160 per dollar and has given back about half of its intervention gains. Fishman views currency intervention as not a sustainable solution, but merely a way to buy time. Previously, after Japan intervened unilaterally in April and May, the yen returned to a 40-year low within a few months. However, the possibility that Japan will intervene again is making investors more cautious, especially as the yen weakens toward 160 per dollar, because the options market still reflects concern that the yen could strengthen suddenly if the authorities act. A key factor in determining whether Japan needs to intervene again is the interest rate differential between the United States and Japan, which remains a major driver of the exchange rate. The 10-year US Treasury yield stands at about 4.690%, while the 10-year Japanese government bond yield is at 2.839%, meaning US assets still offer higher returns and give investors an incentive to hold dollars rather than yen. The market currently prices about a 65% probability that the Bank of Japan will raise rates by 0.25% in September, with total policy tightening of about 0.40% expected by the end of the year. Goldman Sachs warns that if the Bank of Japan does not raise rates as the market expects in September, it could put further downward pressure on the yen and increase the likelihood that the Japanese government will have to return to intervention. In addition, the Bank of Japan may need to raise rates faster than the market expects if it wants to shift the incentive created by the yield differential, which has been a key factor behind the yen's roughly 45% depreciation over the past five years. Another important variable is the United States. If economic data come in weaker than expected, that could reduce pressure on the Federal Reserve to raise rates further and help narrow the interest rate differential between the two countries, which would be positive for the yen. The latest data show that the US consumer price index rose 0.1% in July from the previous month, in line with market expectations, while annual inflation slowed to 3.4% from 3.5% in June, causing US Treasury yields to fall after the release. Still, Goldman Sachs believes that if US economic data or Bank of Japan policy actions diverge from market expectations, investors may increase their expectations that Japan and the United States will intervene again, especially if the yen weakens back through the key level around 160 per dollar.