The yen approaches the critical level of 160, and the effects of the Japan-U.S. joint intervention are gradually fading. The market is on guard for another official action.

The Japanese yen continued to weaken on Wednesday, once again approaching the critical threshold of 160 yen per dollar. Earlier, the rare joint intervention by the U.S. and Japan to buy yen had temporarily propelled the currency to rebound significantly from nearly 40-year lows, but as some of those gains were reversed, the market began to again be wary of the possibility of further intervention by U.S. and Japanese authorities. As of Wednesday's New York close, the yen was down about 0.1% against the dollar, at 159.43 yen per dollar. Since August, the yen has depreciated by over 1%, having given back some of the gains achieved from the joint intervention earlier this month. At the beginning of this month when the U.S. and Japan jointly intervened by buying yen, the currency was close to 164 yen per dollar, near its lowest level in nearly 40 years. This marked a rare coordinated action by the U.S. and Japan in support of the yen. However, against the backdrop of a significant interest rate differential between the U.S. and Japan, the lasting effect of foreign exchange interventions has been limited. After a brief strengthening, the yen has fallen back again, now approaching the 160 threshold once more. This region has remained an important observation level for the market to judge whether Japanese authorities might intervene. Nathan Thooft from Manulife Investment Management stated that it is "premature" to believe the threat of foreign exchange intervention has disappeared. The Japanese government has previously demonstrated its willingness to act and even coordinated with the U.S. Treasury. Therefore, once the exchange rate nears or breaches the recent intervention zone again, traders will surely be more cautious. Thooft said: "We are definitely still in an intervention watch mode." Bank of America strategist Shusuke Yamada pointed out that the joint intervention by the U.S. and Japan initially heightened market confidence in Japan's determination to defend the yen, but over the past week, the dollar against the yen has risen again without official action, suggesting that the deterrent effect of this policy seems to have weakened. One of the fundamental reasons for the continued pressure on the yen is still the large interest rate gap between the U.S. and Japan. Currently, Japan's central bank's benchmark interest rate is 1%, while the Federal Reserve's target range for the federal funds rate is between 3.5% and 3.75%. The higher dollar interest rates continue to enhance the attractiveness of dollar-denominated assets to investors, thus putting pressure on the yen. The market currently expects about a 60% probability that the Bank of Japan will raise interest rates in September, and has fully factored in the possibility of a rate hike in October. Meanwhile, traders believe the Federal Reserve is more likely to raise rates again before December this year. Against this backdrop, market participants believe that relying solely on sporadic foreign exchange interventions is unlikely to fundamentally reverse the yen's trend. The pace of monetary policy tightening by the Bank of Japan in the future will be the key factor determining whether the yen can sustain a rebound. Strategist Brendan Fagan noted that for the yen to achieve more sustained appreciation, it will ultimately depend on the pace of tightening by the Bank of Japan, rather than on sporadic market interventions. The intervals between the Bank of Japan's interest rate hikes are shortening, which is an important sign of a gradual change in Japan's policy response mechanism. The market's next focal point will be the Japanese Producer Price Index (PPI) for July, scheduled to be released on Thursday, to seek further clues about the future policy path of the Bank of Japan. Economists surveyed expect the year-on-year increase in Japan's July Producer Price Index to rise further from Junes pace of 7.1% to 7.4%. The 7.1% growth in June marked the fastest rate since the beginning of 2023. Stefan Grothaus from DZ Bank stated that the continuous weakness of the yen this year may be a significant factor driving up Japan's producer prices. If further depreciation of the yen amplifies import costs and inflation pressures, the strengthened expectations for a rate hike by the Bank of Japan could, in turn, provide some support for the yen. Therefore, as the dollar against the yen once again approaches the 160 threshold, the market currently faces two policy cues: in the short term, traders will be keenly attentive to whether the U.S. and Japan will intervene again in the foreign exchange market; in the longer term, whether the Bank of Japan can accelerate the pace of rate hikes and narrow the U.S.-Japan interest rate differential may be the key to whether the yen can truly break free from long-term depreciation pressures.