Japan has spent extraordinary amounts of money defending the yen. The result, so far, is less impressive. After the first coordinated US-Japan intervention since 1998, the yen surged dramatically, briefly moving towards 155 against the dollar. The move was powerful enough to remind investors that the authorities were prepared to intervene aggressively and, more importantly, that Washington was willing to support them. Only days later, almost half of those gains have disappeared. The yen has moved back towards 158–160 per dollar, once again reviving speculation that Tokyo may need to intervene. This is the real message of the latest market move: intervention can shock the market, but it is still struggling to change the direction of travel.

The authorities have already demonstrated remarkable determination. Japan is estimated to have spent around USD 53 billion in one intervention and another USD 34 billion the following day. That came after record intervention during the Golden Week period earlier this year. The sums are enormous, even for a country with Japan’s foreign-exchange reserves. Yet the market is already testing the authorities again. This matters because intervention works partly through psychology. The objective is not only to buy yen. It is to make investors afraid of selling it. If traders believe that a move above 160 can trigger tens of billions of dollars of official purchases, the risk of maintaining short-yen positions should increase significantly. Leverage should decline, volatility should rise, and the carry trade should become less comfortable.

But there is a problem. Markets learn quickly. The first intervention is unexpected. The second becomes a possibility. By the third, traders begin calculating how far the authorities are prepared to go. That appears to be happening now. The yen’s failure to hold below 155 is important. It suggests investors still believe the underlying economic forces are stronger than the intervention itself. The main one remains the interest-rate differential. The Bank of Japan left rates unchanged last week, while US yields remain elevated. Markets see a reasonable probability of another Japanese rate increase by September, but the gap with the United States remains substantial. As long as investors can borrow cheaply in yen and invest at significantly higher yields elsewhere, the economic logic of the carry trade remains intact. The intervention changes the volatility of that trade. It has not yet destroyed its profitability. This is why the next Bank of Japan decisions matter more than the next USD 50 billion intervention. Tokyo can continue purchasing yen, but if monetary policy remains only gradually restrictive while US rates stay high, investors will continue to test the currency. The authorities themselves appear to understand this. Japanese officials have increasingly linked foreign-exchange policy with monetary policy, while US Treasury Secretary Scott Bessent has suggested that higher Japanese interest rates would provide a more durable solution than repeated intervention. That is an important distinction. Currency intervention treats the symptom. Interest-rate convergence addresses the cause.

The difficulty is that Japan cannot simply raise rates aggressively without consequences. The government carries one of the largest debt burdens in the developed world. Higher rates increase financing costs. Japanese banks and insurers hold large bond portfolios. Households and businesses have spent decades adapting to extremely cheap money. Normalisation therefore has to be gradual. Unfortunately, currency markets do not necessarily share that patience. This tension explains why another intervention near 160 is increasingly plausible. The threshold has become psychologically important. It is not necessarily an official target, but allowing the dollar-yen rate to break decisively through 160 after such an expensive intervention would undermine credibility. Investors would conclude that the authorities had either exhausted their willingness to intervene or were prepared to tolerate further depreciation. That would encourage exactly what Tokyo is trying to prevent: a rebuilding of speculative short-yen positions. This creates an uncomfortable dynamic. The more Japan intervenes, the more important each subsequent intervention becomes. If the first USD 50 billion move produces a large appreciation but the second produces less, markets begin questioning the marginal effectiveness of the strategy. Eventually, intervention can become defensive rather than intimidating. That is the risk Tokyo must now avoid.

US involvement nevertheless makes the current episode very different from previous interventions. Washington has signalled that coordinated action remains possible. This increases uncertainty for traders and gives Japan substantially more credibility than it would have acting alone. The US support also has a broader strategic rationale. A disorderly collapse of the yen would create problems well beyond Japan. It would increase imported inflation in one of America’s most important allies, destabilise Asian foreign-exchange markets and potentially force Japan to mobilise additional foreign assets to finance intervention. Washington therefore has an interest in preventing the currency from entering a self-reinforcing decline. However, even coordinated intervention has limits. The foreign-exchange market ultimately prices relative monetary conditions. If US growth remains resilient, American yields stay elevated, and the Federal Reserve continues to postpone meaningful easing, the dollar retains a structural advantage. The dollar’s recent behaviour illustrates this. It strengthened again as oil prices rose and optimism regarding the Middle East deteriorated. Geopolitical uncertainty continues to support the currency as a defensive asset, adding another layer of pressure on the yen.

This is why Japan’s problem cannot be considered in isolation. The yen sits at the intersection of three forces: Japanese monetary normalisation, US interest-rate policy and global risk appetite. Tokyo controls only one of them. For investors, this makes the yen increasingly interesting but also increasingly difficult to trade. The traditional short-yen carry trade is no longer as straightforward as it was. The risk of official intervention is now real, large and potentially coordinated with Washington. A move of several per cent within hours can eliminate months of carry income. At the same time, buying the yen aggressively also requires confidence that the Bank of Japan will accelerate tightening or that US yields will decline materially. Neither outcome is guaranteed. The likely result is greater volatility. Japan may not be able to reverse the long-term decline in the yen immediately, but it can make that decline disorderly enough for speculators to become more cautious. That would already represent a partial success. Yet there is a limit to how long this strategy can work. Foreign-exchange intervention can buy time. It cannot buy a new monetary regime. If Japan wants a sustainably stronger yen, markets will eventually need to believe that the return available on Japanese assets is becoming competitive again. Until then, every intervention will remain a battle against the same underlying force. And with dollar-yen already moving back towards 160, the next battle may not be far away.