U.S.-Japan yen intervention raises the cost of betting against the currency
Washington’s rare yen purchase with Tokyo lifted the currency and may alter carry trades, but durable support still depends on Japanese policy.
By Sarah Jenkins · Chief Macro Economics Correspondent
· 3 min read
The U.S.-Japan yen intervention on July 31 lifted the currency from near four-decade lows after Washington sold euros from its reserves and bought yen alongside Tokyo. The yen had traded near 163.65 to 163.73 per dollar before the action and subsequently rebounded to roughly 157 to 159, according to CNBC, Reuters and the Wall Street Journal.
Treasury Secretary Scott Bessent confirmed on August 3 that the United States had acted with Japan to curb currency volatility and reduce risks to Asian markets, according to the Council on Foreign Relations. The operation was the first joint U.S.-Japan yen-buying intervention since 1998, CNBC reported.
The historical comparison requires care. The United States also joined a 2011 G7 operation after Japan’s earthquake and tsunami, but that action sought to restrain yen appreciation. The latest intervention was intended to support a weakening currency.
What does the U.S.-Japan yen intervention mean for currency markets?
The immediate effect was a stronger yen. Its broader significance may lie in the signal sent to traders who have borrowed yen to fund investments elsewhere. A carry trade involves borrowing in a low-interest-rate currency, such as the yen, and placing the proceeds in higher-yielding assets.
Jesper Koll, expert director at Monex Group, described the joint action as a “weaponized” yen, referring to the deterrent effect of two sovereign authorities using their balance sheets on the same side of the market. That is an analyst’s characterisation, rather than an official policy label.
Billy Leung, an investment strategist at Global X ETFs, told CNBC that the prospect of coordinated action could make investors more cautious about large short-yen positions. He said some funding activity could move to other currencies, including the euro. Masahiko Loo of State Street Investment said traders would need to account for prospective policy responses alongside economic fundamentals.
The use of euros, rather than dollars, to fund the U.S. yen purchase also surprised markets. Robin Brooks of the Brookings Institution told CNBC that the choice could confuse investors and weaken the effect of U.S. participation. The available reporting does not establish why euros were used.
Why could the operation matter for U.S. Treasurys?
Analysts cited by CNBC said Washington may have wanted to limit the risk that Japan would sell U.S. Treasurys to obtain dollars for a unilateral intervention. Japan’s Finance Ministry said it planned to use the Federal Reserve’s FIMA repo facility for future interventions, CNBC reported.
The facility allows foreign central banks to raise dollar liquidity against Treasurys without selling the securities outright. That could reduce pressure on U.S. funding markets, though the Treasury-market rationale remains an analyst interpretation, not a stated U.S. objective.
Other explanations have also been offered. Brad Setser of the Council on Foreign Relations said a further sharp yen decline could pressure other Asian currencies. Oxford Economics’ Louise Loo told CNBC that Washington had repeatedly viewed the yen as substantially undervalued, while trade, bond-market and geopolitical considerations may also have informed the decision.
Intervention alone may not secure a lasting recovery. Analysts quoted by CNBC, the Council on Foreign Relations and the Wall Street Journal said higher Bank of Japan policy rates, or other changes to the forces behind yen weakness, would be needed to sustain appreciation. On August 3, short-term U.S. rates were about 2.5 percentage points above Japanese rates, the Journal reported, preserving an incentive to fund higher-yielding positions with yen.
This story draws on original reporting from CNBC.
