Goldman Sachs: Japan has the ability to conduct several rounds of yen intervention actions; clients are optimistic about the rising sentiment towards the yen

According to the Zhitong Finance APP, at the end of last month, the US and Japan jointly intervened in the yen exchange rate. Goldman Sachs research strategist Karen Fishman believes that Japan has ample cash on hand, thanks to the financing channels provided by the US Federal Reserve, "sufficient to conduct several rounds of interventions similar in scale to those at the end of July." Goldman Sachs estimates that of Japan's approximately $1 trillion in foreign exchange reserves, about $200 billion is held in cash or cash-equivalent forms, which likely corresponds to the amount used in the intervention action at the end of July.

"Theoretically, they (Japan) would not use all their funds, but this precisely indicates that if they are willing, they indeed have sufficient capacity to continue intervening," Fishman stated. Through the Federal Reserve's financing mechanism, Japan's $1 trillion in foreign exchange reserves can theoretically be converted into liquid funds.

Japanese Finance Minister Shunichi Suzuki has previously indicated that if necessary, the authorities will not hesitate to intervene again. Fishman believes that given the US's first joint intervention with Japan since 1998 to support the yen, Suzuki's remarks carry "some credibility."

Goldman Sachs estimates that Japan used up to $85 billion for intervention during the first two days of the action at the end of July, marking the largest two-day foreign exchange market intervention in Japan's history, second only to the intervention following the Fukushima nuclear disaster in October 2011.

Praneet Shah, head of foreign exchange options trading at Goldman Sachs, pointed out that when the Federal Reserve's mechanism allows Japan to freely convert $1 trillion in foreign exchange reserves into liquid funds, customer sentiment towards the yen has indeed warmed.

Options pricing shows that traders are still preparing for another surge in the yen, and this fear itself may suppress new sell-offs. Shah noted that the high premiums on short-term yen call options indicate that the market remains vigilant against sudden downward trends, making investors cautious about shorting the yen as the exchange rate approaches the 160 mark.

"Even if the yen exchange rate softens to 160, when the market factors in the risk of intervention into the trading price, you would not be willing to continue selling the yen."

Shah stated that whether the Japanese government will intervene again in the future may depend on the US-Japan interest rate differential, which is key to driving exchange rate trends. The Bank of Japan needs to raise interest rates faster than the market expects to change the carry trade pattern that has led to a 45% depreciation of the yen over the past five years