Goldman Sachs: Japan's Foreign Exchange Reserves Exceed $1 Trillion, Providing Ample Ammunition for Further Yen Intervention

At the end of last month, the U.S. and Japan jointly entered the market to support the yen, marking a record-scale intervention. However, the effects of the intervention are fading: the yen has given back about half of its gains, once again approaching the 160 level. This raises the core question for the market—will Tokyo intervene again?

Japan holds over $1 trillion in Foreign Exchange Reserves and can leverage Federal Reserve tools to liquidate them entirely—Goldman Sachs believes this provides ample ammunition for Tokyo to further intervene in the yen.

How Much Ammunition Is There?

Goldman Sachs estimates that of Japan's approximately $1 trillion in dollar reserves, about $200 billion is held in cash or cash equivalents, roughly equivalent to the scale of last month's intervention.

On August 12, Goldman Sachs research strategist Karen Fishman stated on the firm's podcast: "They have enough funds on hand to conduct a few more rounds of intervention on the scale we just witnessed—and that was close to a historical record."

She added, "In reality, they won't use all their funds, but this illustrates one point: if they are willing, they have ample capacity to sustain intervention."

More critically, Japan's Ministry of Finance plans to utilize the Federal Reserve's FIMA repo facility—a tool that allows central banks to exchange U.S. Treasuries they hold for U.S. dollar cash as collateral, without needing to sell Treasuries in the secondary market. This means that, in theory, the entire $1 trillion in reserves could be converted into usable liquidity.

Following this news, market sentiment shifted rapidly. Praneet Shah, Head of FX Options Trading at Goldman Sachs, noted that clients' "bullish sentiment on the yen significantly intensified" last week, precisely because the FIMA facility made the $1 trillion intervention potential readily accessible.

Intervention Credibility Increases, But Effectiveness Remains in Doubt

Japanese officials have publicly stated that they will not hesitate to re-enter the market if necessary. Fishman believes this statement "carries a certain degree of credibility"—primarily because the U.S. jointly intervened with Japan last month, marking the first time since 1998.

Goldman Sachs estimates that Tokyo deployed approximately $85 billion in the first two days of last month's intervention, making it the largest two-day intervention on record, aside from Japan's market entry following the 2011 Fukushima nuclear disaster.

After the intervention, the yen briefly broke above the 200-day moving average at the 158 level. However, Fishman bluntly stated that intervention is "not a sustainable solution... ultimately, it is just buying time." She pointed out that after Japan's unilateral interventions in April and May this year, the yen returned to its 40-year low within months.

Trigger Conditions for the Next Round of Intervention

Goldman Sachs believes there are two core variables determining whether another intervention will occur: the pace of interest rate hikes by the Bank of Japan, and U.S. economic data.

Currently, the interest rate differential between the U.S. and Japan remains substantial. The yield on the 10-year U.S. Treasury note is approximately 4.690%, while the yield on the comparable Japanese government bond is 2.839%, resulting a spread of nearly 190 basis points. This gap continues to attract capital flows into dollar-denominated assets, constituting the fundamental pressure behind the yen's depreciation.

Shah stated that the Bank of Japan needs to "raise interest rates faster than expected" to truly alter this interest rate differential landscape—which is precisely what has driven the yen's cumulative 45% depreciation over the past five years.

Current market pricing indicates a roughly 65% probability of a 25-basis-point rate hike by the Bank of Japan in September, with a cumulative hike of about 40 basis points expected within the year. Fishman warned, "If the rate hike fails to materialize in September, it will create new downward pressure on the yen."

Regarding the U.S., Shah pointed out that weakening economic data would undermine the rationale for further Federal Reserve rate hikes, thereby alleviating pressure on the yen and reigniting market expectations for intervention. He specifically cited the case of July 2024—when interventions by the Bank of Japan and the Ministry of Finance coincided with U.S. CPI data missing expectations, followed by weak non-farm payroll data, making the intervention effects particularly pronounced.

"Once unexpected data emerges, the market will significantly raise expectations for another intervention later this week," Shah said.

The U.S. July CPI data released on Wednesday met expectations: rising 0.1% month-on-month, with the annual rate falling from 3.5% to 3.4%. Treasury yields dipped slightly after the data release.