Despite the sharp rally in the Japanese yen following the coordinated intervention by Japan and the United States in the foreign exchange market, most analysts believe the gains could prove temporary unless Japan's economic fundamentals and monetary policy undergo meaningful change.

The joint intervention provided a strong boost to the Japanese currency, which has risen about 5% since the operation began before surrendering part of those gains.

The yen also strengthened to around 155 per US dollar, compared with levels above 163 per dollar, its weakest point in nearly four decades.

Despite the notable recovery, major global financial institutions argue that the fundamental drivers of the yen have not changed significantly, limiting the prospects for a sustained appreciation.

Intervention alone is not enough

Strategists at UBS believe official intervention can help curb excessive market volatility, but it is not a permanent solution to the yen's weakness.

They said Japan's current policy mix does not provide the conditions needed to strengthen the currency over the longer term, particularly as the Bank of Japan continues to tighten monetary policy only gradually while real interest rates remain in negative territory.

According to UBS, the yen is currently being supported more by the risk of further government intervention than by any meaningful improvement in Japan's domestic economic or monetary fundamentals.

How was the intervention carried out?

During previous intervention episodes in 2022 and 2024, Japanese authorities supported the currency by selling US dollars and buying yen.

This time, however, market reports suggest the US Treasury may have sold euros to purchase yen instead of using US dollars directly, an unusual approach that attracted significant attention from investors.

Despite the coordinated US-Japan intervention, the dollar's reaction remained relatively limited as expectations surrounding US monetary policy continued to support the greenback.

ING said the resilience of the US dollar reflects ongoing uncertainty over the Federal Reserve's next policy moves, particularly regarding the possibility of additional interest rate increases.

The bank added that those expectations continue to support US Treasury yields and sustain global demand for the dollar.

HSBC: Structural reform is the real solution

HSBC believes intervention in the foreign exchange market cannot change the yen's long-term direction unless it is accompanied by a structural shift in Bank of Japan policy.

The bank's analysts said a lasting recovery in the Japanese currency would require a faster pace of interest rate increases, together with a clearer commitment from the Japanese government to support a stronger yen and a reassessment of expansionary fiscal policies that continue to weigh on the currency.

Without those reforms, HSBC believes it will be difficult to expect a sustained decline in the dollar-yen exchange rate, even if official interventions continue.

Could the intervention carry unintended risks?

Some analysts also warned that the coordinated intervention could have unintended consequences for investor confidence in the yen.

They noted that reports suggesting the United States sold euros rather than dollars to purchase yen could lead markets to believe Washington was trying to avoid forcing Japan to liquidate part of its substantial US Treasury holdings to finance the intervention.

Historically, coordinated interventions have typically been funded through dollar sales. Using the euro instead has therefore raised questions among investors about the decision to move away from the traditional approach, potentially weakening the message policymakers intended to send to the market.

Outlook

Most analysts agree that the joint US-Japan intervention successfully halted the yen's sharp decline and forced speculative traders to reduce their short positions, but it is unlikely to provide a long-term solution.

The future direction of the Japanese currency will depend largely on whether the Bank of Japan accelerates the pace of monetary tightening, whether coordination between Tokyo and Washington continues, and how US monetary policy evolves.

Until then, the yen is likely to remain vulnerable to sharp volatility, with authorities expected to intervene whenever the currency approaches levels they consider economically unjustified.