This week, the Japanese yen hit ¥162.66/$, its weakest level since 1986. The last time the rate was at
this level, Japan was deep inside the asset bubble that would erase a generation of wealth. That
context matters, because it is the insight which is informing the Japan’s Ministry of Finance’s (MoF’s)
decisions, and it explains why Japan’s monetary policy playbook has changed.
A NEW ACTION PLAN
Japan has abandoned its practice of telegraphing (communicating) intervention. The old approach
was transparent enough that the market had learned to trade around it. Officials would issue
warnings, traders would gauge proximity to a threshold and position accordingly, the MoF would step
in, the yen would recover briefly, and the carry trade (where investors borrow currencies with low
interest rates and use those funds to invest in currencies with higher interest rates) would rebuild
once the pressure eased. Japan spent a record ¥11.7 trillion, roughly $72 billion, in a single April to
May 2026 intervention window. The yen bounced and fell straight back through the level they had
defended. Tokyo has drawn the obvious conclusion.
What replaces this strategy is silence. No warnings, no line in the sand, no indication of timing. The
decision sits with Japan's top currency official, Atsushi Mimura, who has said nothing publicly since
the last intervention. The objective is not to defend a specific level of the yen but rather to wipe out
speculative short positions before traders have the chance to unwind. Japan’s MoF wants shorting the
yen to feel dangerous in a way it currently does not.
However, constraints on this approach are tougher than the rhetoric. Japan holds approximately $1.16
trillion in foreign exchange reserves, and it is bound by the International Monetary Fund’s
classification rule: three days of intervention counts as a single operation, and Japan can execute only
two more such windows before November without risking its freely floating currency designation.
Japan is using the ambush to try and make the threat feel unlimited.
A DEEPER STRUCTURAL ISSUE
None of this addresses the structural problem. The Bank of Japan (BoJ) rate is 1%. The United States
(US) Federal Reserve (Fed) rate sits at 3.50% to 3.75%. That differential funds the carry trade, and
Japanese monetary policy intervention will not close it.
In addition, carry trade works only until it reverses violently, which is exactly what happened in
August 2024 when the BoJ surprised the market with a 15-basis point hike alongside MoF
intervention. The dollar-yen exchange rate moved from ¥161/$ to ¥142/$ in three weeks. The Nikkei
fell 12% in a single session. Assets with no obvious Japanese connection sold off simultaneously as
leveraged positions were liquidated to cover margin. The short position today is larger than it was
then and the carry trade has been rebuilt and extended through 2025 and into 2026, with US
Commodity Futures Trading Commission non-commercial net positioning running deeply negative on
the yen. A well-timed ambush in thin liquidity like a US holiday, an Asian session, or a Friday close,
could move the dollar-yen exchange rate ¥10 to ¥15 inside days. At that point it is no longer a currency
story, it is a global liquidity event.
Carry positions will unwind, leveraged funds will sell risk assets to cover losses, dollar funding will
tighten across emerging markets, and Japanese institutional investors will simultaneously reassess
the economics of holding foreign bonds as domestic yields make that maths less compelling. Japan's
net international investment position is $3.67 trillion. The 10-year Japanese Government Bond
touched 2.49% in April – its highest level since 1997 – and the response from Japan's life insurers has
already begun. Dai-ichi Life Group has stated publicly that yen-denominated debt currently offers
better returns than hedged foreign alternatives. Half of Japan's 10 major life insurers reduced foreign
bond holdings in the most recent reporting period, which is a rational reallocation as the domestic
market becomes investable for the first time in a generation. The problem, however, is scale. Even a
modest acceleration will move global bond markets.
SOUTH AFRICA IN THE FIRING LINE
The rand sits directly in the path of this. South Africa's open capital account and freely floating
currency mean it absorbs global risk repricing in real time with no capacity to intervene. When carry
trades unwind and dollar funding tightens, the currencies that move fastest are the ones with no
reserve status and a central bank without the firepower to slow the move. The rand qualifies on both
counts. A yen-driven unwind would reprice the rand, widen South African credit spreads, and raise
external funding costs; not because anything changed domestically, but because the architecture of
global capital runs through Tokyo whether Johannesburg is tracking it or not.
A LOOK AT THE MARKETS
THE WEEK’S KEY THEMES:
June US jobs data signalled a cooler labour market
The S&P 500 was flat, while the Nasdaq 100 fell 0.8% as chipmakers remain under AI
valuation pressure
Gold neared $4,200/ounce as softer US jobs data reduced Fed-tightening expectations
The US Dollar Index stayed below 101, on track to end the week lower and snap a two-week
winning streak
BONDS
US Treasury yields softened as June employment data pointed to a cooler US labour market. The 10-
year yield slipped about two basis points to 4.46%, after payrolls increased by only 57,000 and earlier
months were revised lower. Unemployment fell to 4.2%, but mainly because participation weakened
to near 2021 lows. Markets cut September Fed-hike odds to roughly 50%, down from 64%, while Fed
Chair, Kevin Warsh, said softer inflation expectations reduced urgency, though price stability remains
central.
United Kingdom (UK) gilts tracked the US move, with 10-year yields giving back early gains and
falling below 2.8%. Bank of England (BoE) Governor, Andrew Bailey, remained cautious, noting
weaker UK growth but warning that sticky inflation still limits near-term rate-cut scope.
German bund yields held above 2.9%, close to a two-week high, as softer US jobs data, easing
eurozone inflation and reduced European Central Bank (ECB) tightening expectations were balanced.
June headline inflation slowed to 2.8% and core to 2.4%. ECB President, Christine Lagarde, said
growth and inflation risks looked more even, helped by lower oil prices.
The 10-year Japanese Government Bond yield approached 2.8%, near its highest level since October
1996, after a weak auction intensified concerns over fiscal spending, higher borrowing and a ¥370
trillion public-private investment plan to 2040.
The local 10-year yield rose above 8.45% after inflation expectations increased to 4.4% for 2026, 4.2%
for 2027, 3.9% for 2028 and 4.1% over five years, above the South African Reserve Bank’s (SARB’s)
3% target. A US-Iran ceasefire and prospective talks, however, have eased energy and fuel-price risks
before the 23 July decision.
EQUITIES
US equity markets ended mixed ahead of the US Independence Day long weekend as technology
weakness offset reduced rate-hike concerns. The S&P 500 was flat and the Nasdaq 100 lost 0.8%, with
chipmakers under pressure for a second day amid questions over AI-driven valuations. Micron fell 7%,
Applied Materials 7.4%, AMD 4.3%, SanDisk 14% and Marvell 9.8%. Electric Car manufacturer, Tesla
lost 7.5% despite strong deliveries. In contrast, the Dow gained 595 points to reach a record,
supported by traditional sectors, tech company, Apple’s 4.8% rise, and gains of about 3% in payment
technology company, Visa and retail giant, Walmart.
The UK’s FTSE 100 rose 1.7% to 10,653, its highest level since April 17, led by defensive,
pharmaceutical and aerospace names. AstraZeneca gained over 5%, GSK more than 4%, BAE Systems
6.1% and Babcock 5.5%. Aerospace company, Rolls-Royce, consumer goods company, British
American Tobacco, energy companies, BP and Shell, and banks, HSBC and Lloyds, also supported the
advance, while independent oil and gas exploration company, Capricorn Energy, agreed to a takeover
by its peer, Genel Energy.
Germany’s DAX 40 outperformed regional peers, rising 2.2% to a record 25,546. Sentiment improved
on reform measures including €10 billion in tax cuts for lower-income households, pension changes
and affordable-housing initiatives. Agricultural-chemical company, Bayer, climbed 8.2% after
announcing the newly established Ruveon, a separate US glyphosate unit, and receiving a Deutsche
Bank upgrade. Europe’s largest residential real estate company, Vonovia, gained 6% and investment
bank, Deutsche Bank, 5.2%.
The local FTSE/JSE All Share Index closed at 110,449.25 on 2 July, up 0.76% after Wednesday’s softer
session, but only 0.2% above last Friday’s 110,230.96 close. The JSE Top 40 mirrored the move, rising
0.80% to 102,083.88. Despite Thursday’s bounce, the JSE remains below mid-June levels and earlier
2026 highs, reflecting caution after first-half volatility.
COMMODITIES
Brent crude traded near $72/barrel on Friday, close to levels seen before the Middle East conflict
began in late February. Prices eased as traffic through the Strait of Hormuz improved, US-Iran talks
progressed and regional supply risks moderated. Saudi crude exports have recovered to about 90% of
pre-war volumes, while the UAE has restored exports through both Hormuz and an alternative
pipeline. President Donald Trump said negotiations were progressing after Qatari and Pakistani
mediators met US and Iranian officials separately in Doha, Qatar.
Gold approached $4,200/ounce on Friday, extending gains as softer US labour data reduced
expectations for Fed tightening. US June payrolls rose by only 57,000, below the 110,000 forecast,
while unemployment held at 4.2%. Fed funds futures now imply a roughly 50% chance of a September
hike, down from 67%. Fed Chair Warsh noted easing inflation expectations but reaffirmed the Fed’s
price-stability focus. Lower oil prices and improving Hormuz shipping conditions added support.
CURRENCIES
The US Dollar Index stayed below 101 on Friday and was set to end lower for the week, breaking a
two-week winning streak. Softer US labour data drove the move, with June payrolls rising only 57,000
versus 110,000 expected, while unemployment held at 4.2%. Fed funds futures cut September hike
odds to about 50% from 67%, and Fed Chair Warsh said inflation expectations were easing, however,
price stability remains the Fed’s focus.
The euro moved toward $1.145/€ as dollar weakness supported a rebound from one-year lows. Gains
were capped by softer eurozone inflation, with headline CPI slowing to 2.8% from 3.2% and core
inflation easing to 2.4%. ECB President Lagarde, said growth and inflation risks had diminished as
energy pressure eased.
Sterling rose toward $1.34/£, its strongest level in two weeks, helped by the weaker dollar and better
risk sentiment as US-Iran talks progressed. BoE Governor Bailey stayed dovish, citing slower UK
growth but warning that sticky inflation still argues against imminent rate cuts.
The yen traded near ¥161/$ after a near-1% rebound, supported by weaker US data and intervention
concerns. Japanese Finance Minister, Satsuki Katayama, said authorities could act at any time, while
reports that Japan may stop signalling intervention plans helped unwind speculative short-yen
positions.
The rand traded stronger at R16.21/$ following comments from Fed Chair Warsh, and softer than
expected US labour data, that pressured the dollar, and reduced the chances of a Fed rate hike
towards the end of the year. South African and U.S. inflation figures will be closely monitored to gauge
the likely path of SARB interest rates.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.21
EUR/ZAR: 18.56
GBP/ZAR: 21.68
BRENT CRUDE: $71.81
GOLD: $4,180.84
Written by Citadel Advisory Partner and Citadel Global Managing Director, Bianca Botes.
Sources: Bank of Japan, Bloomberg, IMF, People’s Bank of China, Reserve Bank of India and South
African Reserve Bank.
