The opinions expressed here are those of the author, a columnist for Reuters

By Jamie McGeever

ORLANDO, Florida, June 3 (Reuters) - The yen's slide back to 160 per dollar, only weeks after Japan's large-scale interventions to support the currency, has called into question the wisdom of such action. But viewed through a wider lens, Tokyo's strategy appears to be working.

The 160-per-dollar level is widely seen as an unofficial threshold past which the yen's JPY= fall will likely prompt authorities in Tokyo to intervene in the foreign exchange market to prevent further depreciation.

That's what the Bank of Japan did, on behalf of the Ministry of Finance, in late April and early May, spending a record 11.7 trillion yen ($73.5 billion).

While some MOF officials may be nervous about intervening on such an enormous scale, something needed to be done. The Iran war has sparked one of the biggest global energy shocks in history. Japan imports 90% of its energy, and the yen is near its weakest point in 40 years. That's a toxic inflationary mix for Japanese people, and a politically toxic one for the government.

Yet even though the yen strengthened to ⁠155 per dollar in the following days, it later resumed its decline.

Does that mean the policy has failed?

"Just another reminder currency intervention in large developed FX markets doesn't work," Bob Elliott, CEO at Unlimited Funds and a former executive at hedge fund giant Bridgewater, posted on X on Tuesday.

On the surface, it seems that way: $73.5 billion of Japan's overseas dollar deposits or official currency reserves are gone, and the yen is right back at the level that triggered the intervention. This follows the then-record bouts of intervention in late 2022 when the yen was around 150 per dollar, and mid-2024 when it was 162.

Cumulatively, Japan has spent an eye-popping $215 billion in these attempts to slow or reverse the yen's decline. If the measure of success is a stronger exchange rate, Tokyo's efforts have been in vain.

ULTRA-LONG-TERM TRADES

But there's another way of measuring success.

Japan is intervening to put a floor under the yen, not necessarily to strengthen it over the long term.

In addition, the argument that Japan is "throwing good money after bad" may not hold water because, when looking at all interventions in recent decades - both buying and selling – Tokyo appears to be in the black.

Japanese authorities in the past were famed for their yen-selling interventions, part of their efforts over two decades to pull the economy out of a deflationary funk that was in part caused and sustained by the strong exchange rate.

The last official yen sales were in 2010, when the yen was around 80 per dollar, and 2011, when the currency hit a record near 76 per dollar. Buying dollars at 80 yen then and selling around 160 now is a pretty good trade, even if an extremely long-term one.

Selling dollars for significantly more than their purchase price realizes a capital gain for the government, which can be used to pay down domestic debt or for other government fiscal purposes, as Brad Setser, senior fellow at the Council on Foreign Relations, has argued.

"Selling reserves at 160 (yen per dollar) absolutely reduces the stock of debt outstanding. It's not a huge reduction, but directionally, Japan is booking a profit," Setser says.

But others push back against the view that Japan's dollar-selling intervention today is realizing a capital gain on the dollar-buying intervention of yesteryear that the government can use to fund current expenditure.

According to analysts at Barclays, trading gains – not valuation gains – are booked as revenue in Japan's Foreign Exchange Fund Special Account system. Boiling down the complexity, they say trading gains are calculated using the average FX rate from the previous two months.

So, even if the sale of dollar assets years after their purchase generates a profit, it only inflates assets on the Foreign Exchange Fund Special Account balance sheet.

They estimate that the most recent bout of intervention points to no more than 90 billion yen ($562 million) potentially being transferred to the government, and even that would be in the next fiscal year.

But putting aside the technicalities of Japan's intra-government balance sheets, Japan still appears to have plenty of room to sell dollars without depleting reserves to a worrying degree.

Its $1.38 trillion stash of FX reserves is the second largest in the world. Its $1.19 trillion holdings of U.S. Treasuries are the largest official holding of U.S. debt in the world.

These assets earn income. Assuming a current weighted average yield on U.S. Treasury debt of around 3.5%, Japan is earning more than $40 billion a year on its Treasuries holdings. With U.S. yields on the rise, that interest income will also increase.

Given all this runway, what can be agreed on is that Japan will almost certainly intervene again.

(The opinions expressed here are those of the author, a columnist for Reuters)

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