The yen fell below the 160 mark, and Bessant defended last month's intervention: disorderly yen movements will push up US interest rates.

The yen has fallen below the key psychological level of 160 against the dollar again, erasing more than half of the gains made by the previous joint intervention by the US and Japan, and market expectations for a new round of intervention are rising.

Federal Reserve Chairman Warsh's statement that the Fed is committed to achieving its inflation target boosted the dollar, while the yen fell as much as 0.5% to 160.16.

Earlier this month, the yen failed to hold the 155 level after joint intervention and has been under pressure ever since; despite US Treasury Secretary Bessenter's recent efforts to lower long-term US Treasury yields, the yen's downward trend has not been reversed.

Bank of America foreign exchange strategist Alex Cohen said:

"With the yen approaching the psychological level of 160, expectations of intervention will inevitably rise. However, given that this round of movements is essentially driven by the US dollar and US interest rates, the authorities may be more patient."

In a letter to Democratic Senator Warren on August 27, Bessant publicly defended his involvement in the yen intervention last month. He pointed out that disorderly yen movements could force him to sell off US Treasury bonds, ultimately pushing up borrowing costs for American households and businesses.

Bessant defends intervention: Disorderly yen trading will drive up US borrowing costs

In a letter dated August 27 to Democratic Senator Elizabeth Warren, U.S. Treasury Secretary Bessant publicly defended the decision to intervene last month, which was subsequently posted on social media platform X.

In the letter, Bessant explained the logic behind the US intervention:

"Japan is a major holder of U.S. Treasury bonds. Disorder in the yen market could trigger forced liquidations, thereby destabilizing global markets and ultimately pushing up borrowing costs for U.S. households and businesses."

Bessant declined to disclose the specific scale of the US intervention, only stating that the operation used "existing foreign currency assets of the Foreign Exchange Stabilization Fund (ESF)," and that euro assets were involved.

He also emphasized that the U.S. had not provided any credit to Japan, stating, "Japan has no debt to the Ministry of Finance, therefore there is no risk of Japan defaulting."

Warren, in his capacity as the ranking Democrat on the Senate Banking Committee, had previously demanded that Bessant provide analytical justification for using the ESF. Bessant responded with strong language, even suggesting that Warren take "any introductory international finance course" and offering to provide an "introductory foreign exchange tutorial."

Warren spokesperson Saloni Sharma responded that Bessant "should focus on reducing the cost of living for American families, not making verbal attacks."

Intervention has had limited effectiveness; interest rate divergence is the fundamental pressure.

The recent depreciation of the yen reflects deep-seated market skepticism regarding the effectiveness of government intervention. On July 31, the US and Japan jointly purchased yen, completing their first coordinated intervention since 1998, with Japan spending a record $96.4 billion that month. However, the market has gradually absorbed the gains resulting from the intervention.

Markets Live macro strategist Brendan Fagan points out:

"The yen's performance on Friday suggests that the intervention and its short-lived impact are far less significant than the ongoing trend in global interest rates. The dollar/yen pair has only retraced about half of its losses from this record intervention, leaving room for the market to move into a range that Japanese authorities may deem unsuitable."

The fundamental contradiction lies in the persistent interest rate gap between Japan and the US. Warsh warned that the cooling of inflation is not significant, leading the market to increase bets on a Federal Reserve rate hike. Investors are also concerned about Japan's heavy debt burden and the ripple effects of the recent rise in global oil prices.

The 160 level is no longer a valuation threshold, but has evolved into a policy defense line.

Market participants are redefining the meaning of the 160 level. Masahiko Loo, senior fixed income strategist at State Street Investment Management, stated:

"160 is no longer a valuation level; it's becoming a policy level. Washington and Tokyo have effectively drawn a political red line around 165."

Masahiko Loo also stated that the possibility of the Bank of Japan intervening again before raising interest rates in September cannot be ruled out.

The Bank of Japan will hold its policy meeting next month, and market pricing indicates an approximately 80% probability of a rate hike. It is understood that Prime Minister Sanae Takaichi's government supports a recent rate hike by the Bank of Japan, partly due to concerns about the continued weakness of the yen—before the intervention was initiated, the yen had been hovering near a forty-year low of around 164.

Geoffrey Yu, senior strategist at Standard Chartered Bank, believes that Japanese authorities are currently inclined to postpone intervention given the upcoming interest rate meeting. "Tokyo must take concrete action to stabilize the foreign exchange market," he said.

Hedge funds rebuild short positions, and carry trades make a comeback.

Hedge fund holdings indicate that bearish sentiment towards the yen is rising.

Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that hedge funds cut their short yen positions by more than half after coordinated intervention, but have since covered some of them in the week ending August 18. Market observers point out that investors are repositioning their carry trades with the yen as the funding currency.

The yen had previously stalled at the 155 level, failing to sustain its post-intervention rally, and subsequently came under continued pressure, falling below 160 this week. Analysts generally believe that as long as the divergence in US-Japan interest rates remains largely unchanged, the effectiveness of the intervention will continue to be tested by the market.

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