Merlin Weekly Macro: The yen intervention conundrum

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Manning the pumps to save the yen

A notable event since our edition a week ago was the unusual joint intervention by US and Japanese authorities to prop up the sagging Yen. Except in emergencies, governments don’t usually do this sort of thing, and especially not in concert.

Like Canute attempting to hold back the tide, treasuries or central banks can expend significant sums to little or no effect beyond a splash, some ripples and potentially getting thoroughly wet. There are many moving parts to this story; Donald Trump is a transactional president unknown for his altruism and generosity of spirit; markets are concerned about the Japanese deficit and the country’s debt levels both of which are increasing partly thanks to the major rearmament programme demanded by the same Donald Trump.

What is important to remember in any analysis of currencies and foreign exchange is that there are always two sides to the same coin.

The Tokyo perspective: kilter restoration?

The Japanese currency has lost more than a third of its value against the dollar over five years; more significantly, at the end of July it had reached its lowest level since 1986. For a major exporting country with a current account surplus with the rest of the world amounting to 4.7% of GDP in 2025, a weakening currency was a boon for its exports, particularly cars, white goods and electronics. However, for the goods it needs to import, particularly oil, fertiliser and many foodstuffs, if recent commodity prices have been elevated because of exogenous supply-side shocks emanating from the conflict in the Gulf, and before that the Covid and Ukraine crises inflation hump, a weak currency has only added to Japan’s domestic inflation pressure for consumers and businesses.

Uniquely (largely because it is illegal elsewhere), Japan’s central bank was the only western member of the Special Drawing Rights group of strategic reserve currency banks (i.e. the US Fed, the Eurozone ECB, the Bank of England and the BoJ, plus the People’s Bank of China) to pursue a monetary policy that revolved around attempting to fix the 10-Year government bond yield through price manipulation, rather than setting an interest rate commensurate with meeting the 2% inflation target common to those principal western economies (it maintained a negative interest rate of 0.1% for 17 years). When inflation spiked viciously in 2021/22 and the others ramped up their own interest rates to deal with it, the BoJ under the leadership of Mr Kuroda stuck to maintaining a yield of 0.1% on the 10-Year Japanese Government Bond. As the interest rate spread widened rapidly against other countries, investors dumped the yen to buy competing currencies on a much higher rate of return.

With no immunity against current exogenously-created inflation after decades of significant idiosyncratic deflation and knowing the prevailing monetary policy was not only unsustainable but totally inappropriate, under new leadership of Mr Ueda since 2023, the BoJ has gradually weaned itself off the strict policy of yield curve fixing following a tentative move towards policy normalisation using interest rates. However, in July 2024 a surprise rate hike to 0.25% with no warning caused a sensation, momentarily giving global markets a sharp dose of the collywobbles (we wrote about it in these columns at the time). Today, Japan’s interest rate has crept up to 1.0%; with the bond yield fixing policy abandoned, the current yield on the 10Y Japanese Government Bond is 2.8%, the highest since 1996. But sharing the same inflationary pressures as everyone else, the yawning gap between Japanese interest rates and others, especially the US (at 3.75%) as the previously anticipated Federal Reserve rate cuts were de-railed by Trump’s conflict in the Gulf with Iran, has kept relentless pressure on the yen.

Washington’s viewpoint: it’s America First, of course!

So, what’s in it for the Americans to help? As ever with Trump, from the US perspective it’s all about America First. The US has a large trade deficit with Japan; Trump’s economic strategy is to rein in trade imbalances, making imports into the US more expensive and its own exports more competitive. Tariffs are one strategy which Trump has deployed with profligacy and naked aggression; the other, entirely consistent with tariffs, is a weaker dollar. Remember what we said at the top of this article: there are always two sides to an exchange rate; in this case, if the yen is weak against the dollar, the opposite must be true of the dollar against the yen.

In November 2024, Trump’s personal economic adviser, Stephen Miran, chief Strategist at Hudson Bay Capital and briefly a Federal Reserve governor before standing aside to make way for new chairman Kevin Warsh, argued that US financial repression was rooted in an overvalued currency. Known as the Triffin Paradox, the situation is made more challenging by the dominance of the US dollar in the global currency system and its natural tendency to be strong.

Governments do not control their exchange rates but they can try and exert an influence over sentiment. “Talking down” the dollar (including Donald Trump confecting rows with the Federal Reserve about inappropriate policy and personally targeting its former Chairman, Jay Powell, as a “loser” and much worse), 2025 saw the US currency lose 12% of its value. In 2026 in the “flight to safety” as investors have bought hard currency assets as security against the military situation in the Gulf, the dollar has been appreciating again. Dollar appreciation has also been stoked by comments from Warsh at the Fed pointing to renewed upward pressure on US interest rates.

In this coordinated intervention, while the Japanese government was spending north of $50 billion buying yen, Trump’s Treasury Secretary, Scott Bessent, apparently opted to sell US-held euros also to buy yen to the tune of $10 billion (Trump professes to love Europe but he despises the EU and has nothing but contempt for its leaders; on the other hand, he and Japan’s new prime minister and fellow conservative, Sanae Takaichi, are so far getting along just fine). The immediate reaction saw the yen strengthening by 1% on the day and the dollar weakening 1.5% against a basket of major currencies.

The second important element in US thinking was doubt over Japan’s extensive holdings in US government bonds (officially Japan is the biggest foreign holder of US Treasuries even if many believe that it is China with more stashed away in its vaults); with a sinking yen and a widening deficit, to protect its balance sheet Japan could have decided to dump US Treasuries which in turn would have put pressure on bond prices and forced up yields raising US government borrowing costs.

So what? And what next?

The big question markets are asking now is what happens next? Or was that it? In which case what was the point? Indeed, have both the Japanese and US authorities missed the point? Of the yen’s recovery since last week, half the benefit has already been given back. So far, the effect has been like the application of a thin disposable gauze on the gash that is the two-and-three-quarter percentage points separating the Japanese and US interest rates. That gash has not been sutured shut. Rationally, only monetary tightening with higher interest rates in Japan (the most appropriate course of action) or monetary loosening in the US (unlikely in the near future) can close the gap.

In support of the need for the BoJ to take more robust action, consider the differences.  On the current reported data, the US has a positive inflation-adjusted real interest rate of 0.25% (Fed Funds are 3.75% while the most recent US CPI print was 3.5%); with an interest rate of 1.0% but inflation running at 1.7% and rising, Japan has a negative real interest rate of 0.7%. The evidence says this is a monetary policy mismatch of which the yen’s weakness is a symptom.

The big problem facing the BoJ’s Ueda is Japan’s enormous debt: how to fund it and refinance it. With government debt close to 250% of GDP, Japan is the most indebted major western economy; rising borrowing costs are potentially a significant fiscal drag despite the BoJ owning 53% of all outstanding bonds and rebating the interest to the government after deducting its own operating costs. Ueda’s is a fine and complex balancing act.

Sanae Takaichi maintains that her government is prepared to give further support to the yen. Governments betting against the markets seldom win (famously the hedge fund manager George Soros, for whom Bessent used to work, made a huge fortune betting on currencies and baiting governments; on the other hand, John Major and his former Chancellor Norman Lamont still bear the ineradicable reputational scars of “Black Wednesday”, 16 September 1992, when sterling was unceremoniously dumped out of the European Monetary Union system—that our ejection from EMU’s straight jacket was our own economic liberation day was irrelevant). Sinking billions of dollars into a 1% yen appreciation makes no difference at all to Japan’s fortunes; yet doing the same again only encourages the speculators that there are fortunes and reputations to be made betting against the government even if the result is potential financial instability.

The Merlin Portfolio perspective

The Jupiter Merlin Portfolios have significant exposure to Japanese equities. Our positioning was predicated on the view that the Japanese stock market was undervalued. Dating back to 2015, under a strategic reform programme initiated by then prime minister Shinzo Abe (it became known as “Abenomics”) and still actively pursued by the government and the Tokyo Stock Exchange, companies are becoming better managed, more efficient and governed more effectively. While making good progress, the programme is not yet finished.

Gyrations in the yen have an impact on these positions but the yen on a purchasing parity basis is significantly undervalued versus global peers. If the Bank of Japan continues to move its monetary policy more towards a western footing, there could be major gains from yen appreciation favouring holders of Japanese assets. We believe that the equity opportunity is attractive enough on its own fundamentals; any currency benefit would be a bonus.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions. 

Fund Risks

For a more detailed explanation of risk factors, please refer to the “Risk Factors” section of the Scheme Particulars.

All of the Jupiter Merlin portfolios carry the following fund risks:

Currency (FX) Risk - The Fund can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.

Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.

Derivative risk - the Fund may use derivatives to reduce costs and/or the overall risk of the Fund (this is also known as Efficient Portfolio Management or “EPM”). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Fund.

Counterparty Risk - the risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the Fund’s assets.

Charges from capital – Some or all of the Fund’s charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion

Additionally, Jupiter Merlin Balanced Portfolio, Jupiter Merlin Conservative Select, Jupiter Merlin Income Portfolio, Jupiter Merlin Monthly Income Select, and Jupiter Merlin Moderate Select, Jupiter Merlin Income & Growth Select have the following fund risks:

Interest Rate Risk - The Fund can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates e.g. the value of a bond tends to decrease when interest rates rise.

Credit Risk - The issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due.

Furthermore, Jupiter Merlin Balanced Portfolio & Jupiter Merlin Growth Portfolio have the following fund risk:

Liquidity Risk - Some investments may be hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund's ability to meet redemption requests upon demand.