The yen is once again approaching 160, but why are the shorts hesitant to act? Goldman Sachs analyzes Japan's trillion-dollar "intervention ammunition."

Goldman Sachs stated that Japan has sufficient cash on hand to support several rounds of yen intervention operations similar in scale to last month's historic efforts, and that Japanese authorities can also access funding support from the Federal Reserve. Goldman estimates that of Japan's approximately $1 trillion in foreign exchange reserves, about $200 billion is held in cash or high liquidity equivalentsroughly equivalent to the scale of Japan's intervention actions in July. Karen Fishman, a strategist at Goldman Sachs, said on Wednesday, They have enough resources to conduct several more rounds of trading at the historic record levels we just saw. In reality, they are unlikely to use all the funds, but I think this precisely indicates that if they are willing, they have the full capability to continue intervening in the market, Fishman stated. Federal Reserve FIMA Tool: Theoretical Unlimited Backstop In addition to their cash reserves, Goldman also specifically mentioned the Federal Reserve's "Foreign and International Monetary Authorities Repo Facility" (FIMA). This mechanism allows central banks to use their holdings of U.S. Treasury securities as collateral to borrow U.S. dollar cash from the Federal Reserve, enabling them to quickly mobilize the dollars needed for intervention without having to sell U.S. Treasuries in the secondary market. Fishman explained that through this tool, Japan could theoretically convert its entire approximately $1 trillion in foreign exchange reserves (including non-cash U.S. Treasury securities) into deployable liquid funds. The Japanese Ministry of Finance had previously publicly stated its intention to selectively use this mechanism. Fishman noted that given the recent joint intervention with Japan for the first time since 1998, this assertion carries a degree of credibility. Additionally, after the 2011 earthquake, Japan and the U.S. coordinated actions with other G7 nations to curb the yen's appreciation. This prospect has significantly changed market sentiment. Pranav Shah, head of foreign exchange options trading at Goldman Sachs, mentioned that after clients learned last week that Japanese authorities could utilize the Federal Reserve mechanism to deploy a trillion-dollar reserve for intervention, bullish sentiment towards the yen markedly increased. Historical Intervention Effect Fading, Yen Retraces Half of Its Gains Looking back at last month, Japan and the U.S. jointly intervened in the foreign exchange market for the first time since 1998, with Japanese authorities deploying as much as $85 billion within two trading days, a scale only second to the interventions following the Fukushima nuclear disaster in 2011. Before the joint intervention by Japan and the U.S., the yen's exchange rate had fallen to 164 yen per dollar, hovering near a nearly 40-year low. The intervention briefly succeeded in pushing the yen's rate up to the 158 range, breaching the 200-day moving average. However, the effectiveness of the intervention is fading: on Wednesday, the yen-dollar exchange rate fell back near the critical 160 level, having retraced about half of the gains prompted by the intervention. Fishman remarked that this kind of intervention is not a sustainable solution... ultimately just buys some time. He also pointed out that the interventions Japan implemented solely in April and May this year serve as a cautionary exampleafter a brief rally, the yen once again hit a 40-year low within months. Factors Triggering Future Interventions: Interest Rate Differentials, Data, and Central Bank Meetings Shah indicated that whether Japanese authorities will intervene in the foreign exchange market again may depend on the interest rate differentials between Japan and the U.S., which remain a major driving force behind the yen's depreciation. Later on Wednesday, the yield on 10-year U.S. Treasury bonds stood at 4.690%, while that on 10-year Japanese government bonds was at 2.839%, providing significant incentive for investors to hold U.S. Treasuries. In Japan, the market currently expects a 65% probability of a 25 basis point interest rate hike by the Bank of Japan in September, with expectations of tightening rates by about 40 basis points by the end of the year. Fishman stated, If they dont raise rates in September, that will again put downward pressure on the yen. Shah pointed out that the Bank of Japan needs to raise rates faster than the market anticipates to alter the arbitrage trading pattern that has led to a 45% depreciation of the yen over the past five years. In the U.S., Shah mentioned that weak economic data could alleviate pressure on the yenthis would lessen the Fed's justification for further rate hikes and rekindle market expectations of renewed Japanese intervention. He specifically referenced the scenario in July 2024: at that time, the Bank of Japan and the Ministry of Finance conducted a very effective intervention, coinciding with U.S. CPI data falling short of expectations, and shortly thereafter, non-farm payroll data also came in below expectations. He stated, If U.S. economic data unexpectedly weakens, I think the market will begin to elevate expectations for subsequent interventions later this week. The U.S. inflation data released on Wednesday met expectations, showing a 0.1% increase in the consumer price index in July, in line with widespread market expectations; the annualized inflation rate fell from 3.5% in June to 3.4%. Following the release of the report, U.S. Treasury yields fell. In summary, Goldman Sachs believes that Japan still possesses ample ammunition for foreign exchange interventionwhether through the $200 billion cash reserves or the theoretically mobilizable entire $1 trillion reserves via the Federal Reserve's FIMA tool, both providing Japanese authorities with strong policy options. However, intervention is ultimately only a temporary measure, and the long-term trajectory of the yen's exchange rate will still depend on the evolution of U.S.-Japan interest rate differentials and the actual trajectories of monetary policy in both nations. The September Bank of Japan policy meeting will be a critical juncture for the market to assess whether this round of yen trading can be sustained. Options pricing indicates that traders remain wary of another surge in the yen, and this concern itself may dampen new selling pressure. Shah noted that the high premiums on short-term yen bullish options indicate that the market remains alert to the possibility of a sudden spike in the yen, which makes investors reluctant to short the yen when it retreats to around 160. He stated, If the spot exchange rate truly approaches 160 and the market has fully priced the risk of a significant pullback, then continuing to sell the yen will face real risks.