David McNay, CFA
Julian Whitaker
Key takeaways
- Japan and the US engaged in a co-ordinated intervention in the currency markets causing a 5-standard deviation [note1] move in Dollar-Yen.
- Authorities in Japan intervening in the currency markets is not unusual, what is different this time is a) coordination with the US Treasury department and b) weaponisation of volatility to disincentivise speculative trading.
- On a value basis the Yen is extremely cheap. But attractive valuations are battling a combination of expansionary fiscal policy and relatively divergent monetary policy, which would typically point to a weaker currency.
- Investors in Japanese equity are embedding a currency view into their positions by holding the equity hedged or unhedged; investors may want to ensure that view is deliberate.
- The FTSE Japan 100% Hedged index in USD has outperformed the unhedged index over 1, 3 and 5 years.
What happened?
Figure 1: Dollar-Yen on an inverted scale with daily price moves and +/- 2 standard deviation bands.
Source: FTSE Russell, data to August 4, 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
The move was a co-ordinated intervention between the Japanese Ministry of Finance (MoF) and the US Treasury Department. In which as estimated [note2] ¥14tn ($88bn) were purchased over 2 trading sessions. Following the intervention, Japanese Finance Minister Satsuki Katayama stated “We will not hesitate to conduct further joint intervention.”; sentiment reiterated by Scott Bessent.
That the MoF is intervening in the currency markets is not unusual, records show that between 28 April – 27 May 2026 the MoF bought ¥11.74tn of JPY, and there were similar campaigns in 2024 [note3] . This campaign in unusual for two key reasons:
- Weaponisation of volatility
- Repo agreement with the US Treasury
Weaponisation of volatility
For this intervention a 5 standard deviation event was likely not an accident but an objective. The Yen is the 3rd most traded currency globally with $1.6 of average daily over-the-counter (OTC) turnover according to the BIS [note4]. Put another way, the Yen is too big to be defended for a sustained period.
By running a large intervention over a short window the MoF can disincentivise geared macro bets by short term speculators by potentially ‘stopping out’ trades and making it more costly to engage if future bets.
Repo agreement with the US Treasury
What led us here?
In an earlier insight [note6] we noted that PM Takaichi is philosophically aligned to former PM Abe but that the economy she inherited is markedly different to the Japanese economy at the start of Abenomics. Specifically that there is no longer Yield Curve Control (YCC) anchoring the JGB curve, which meant that unlike during Abenomics fiscal policy and monetary policy may work against one another.
On a valuation basis the Yen is extremely weak [note7] which we can observe from the real effective exchange rate (REER) in Figure 2 which shows trade weighted currency adjusted for inflation, alongside the 10Y simple moving average.
Figure 2: The Real Effective Exchange Rate (REER) with the 10Y moving average.
Source: BIS data to June 30, 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
But valuation faces a headwind of expansionary fiscal policy and a widening, relative, interest rate differentials with the US – which has been driven more by a more hawkish Fed rhetoric than it has by a significant policy change by the Bank of Japan (BoJ).
Figure 3: US and Japanese interest rate differentials and the USDJPY.
Source: FTSE Russell, data to August 4, 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Who remembers the Abenomics trade?
More mature readers may remember the Abenomics trade, which was to take a long position in Japanese equity and to sell short the Yen. We won’t opine on the efficacy of the trade, other than to highlight that for the reasons outlined above the probability of a large shift – in either direction – of JPY is elevated and therefore equity are embedding a view on the Yen in their decision to hold Japanese equity hedged or unhedged.
Many investors are surprised by the magnitude of the performance differences between hedged and unhedged Japanese equity returns. Over 12M, the end-of-July, the FTSE Japan 100% Hedged index has outperformed the FTSE Japan index by 12.3ppts; over 3Y that spread is c. 43ppts.
Figure 4: 12M performance of the FTSE Japan Index TR USD unhedged and the 100% hedged versions.
Source: FTSE Russell, data as of 31 July 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
In Much ado about hedging [note8], we noted that the primary objective of currency hedging is mitigating FX, which we can see from the 5Y drawdowns of the unhedged vs. 100% hedged FTSE Japan indices.
Figure 5: Drawdowns of FTSE Japan Index TR USD Unhedged vs 100% Hedged over the last 5Y.
Source: FTSE Russell data as of August 6, 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Conclusion
Co-ordinated Yen intervention marked a change in strategy in how authorities are defending the Yen; joint intervention with the US was aimed at increasing volatility rather than reducing it.
Equity investors in Japan are embedding a currency view into their decisions. Given the potential for a meaningful directional shift – stronger or weaker – in the Yen it makes sense for that decision to be explicit rather than implicit. The performance differential is material with the hedged index outperforming by c. 12.3% and 43% over 12M and 3Y respectively.
footnotes
[1] Standard deviation calculated as 10 years of daily observations using WMR close prices to July 31, 2026 | Back to Note 1
[2] The real message in the yen intervention | Back to Note 2
[3] Japan Ministry of Finance data shows ¥5.54tn in July 2024, ¥9.80tn in April-May 2024 and ¥6.35tb in a campaign from October 2022 | Back to Note 3
[4] According the BIS Triennial Central Bank survey: https://www.bis.org/statistics/rpfx25.htm | Back to Note 4
[5] The Foreign and International Monetary Authorities (FIMA) Repo facility: https://www.federalreserve.gov/monetarypolicy/fima-repo-facility.htm | Back to Note 5
[6] https://www.lseg.com/en/insights/ftse-russell/sanae-takaichi-can-the-rock-star-of-japanese-politics-drum-to-the-beat-of-the-markets | Back to Note 6
[7] Potential tourists to Japan may wish to note that on The Economist Big Mac index, as of July 30, 2026, the Japanese Yen is 50.4% undervalued vs. the US Dollar; -47.2% on a GDP per-capita basis | Back to Note 7
[8] https://www.lseg.com/en/insights/ftse-russell/much-ado-about-hedging | Back to Note 8
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