Odd Lots · Thursday, August 6, 2026
Brad Setser believes the recent currency intervention to support the Yen will only be effective if the Bank of Japan raises interest rates, potentially multiple times. Failure to hike rates in September would signal a lack of commitment and likely lead to the intervention being tested, despite underlying supportive fundamentals for the Yen.
“I think it will be enough if the Bank of Japan is going to raise rates and maybe raise rates several times. I think the only reason why it wouldn't be enough if the Bank of Japan is going to raise rates. And look, I think if the Bank of Japan doesn't raise rates in September, this will be tested clearly. I mean, that would signal there's not full commitment inside Japan to defending the currency.”
“So in that context, this huge foreign portfolio of Japanese institutional investors is generally becoming less hedged over time. You change that, and I think you change the dynamics. And where I probably differ a bit from people like Adam or more like the conventional international macroeconomics school, is that, you know, I do think Japan is unique in a couple of ways. One way it has been unique is that, you know, the companies that have this massive foreign presence make enormous profits abroad. Those profits translate into enormous gen profits, but they don't actually bring the dollars euros you on that they earn a broad back home. They tend to reinvest, so that doesn't generate a flow, and then the irony is a lot of the non FDI foreign assets are held by the government.”