The U.S. Treasury recently intervened in the foreign exchange market by purchasing between $5 billion and $10 billion worth of Japanese yen, executed around August 1 through the Federal Reserve Bank of New York. This move, designed to prop up Japan's struggling currency, was telegraphed by Treasury Secretary Scott Bessent, whose meeting agenda on July 31 included the yen purchase. Goldman Sachs and Morgan Stanley facilitated the transaction, which is the first U.S. yen intervention in over a decade.
JPMorgan, however, has warned that the Treasury's capacity for sustained intervention is more limited than markets might assume. Unlike the Federal Reserve's ability to expand its balance sheet, the Treasury operates with finite foreign exchange reserves. JPMorgan's analysis indicates that the $5 billion to $10 billion committed, while significant in daily positioning, is a small amount compared to past interventions. For instance, Japan spent between $35 billion and $60 billion on yen-buying intervention from 2022 to 2026.
JPMorgan stated that the Exchange Stabilization Fund, which held approximately $13 billion in euro-denominated assets and $25.5 billion in dollar assets as of June, has finite resources. Should further intervention be necessary, the Treasury would likely need to resort to "extraordinary measures" to expand its capacity, potentially requiring congressional budget approval. JPMorgan estimates that the Treasury could raise its intervention capacity to as much as $187 billion by utilizing International Monetary Fund special drawing rights (SDRs) and converting foreign-currency assets into dollars. If the Federal Reserve were to join, this amount could effectively double.
Despite the recent intervention, JPMorgan suggests that a sharp yen rally pushing the dollar-yen exchange rate below 150 is improbable through joint intervention alone, as neither country seems intent on aggressively strengthening the yen. Historical precedents, such as the June 1998 joint yen-buying intervention by the U.S. and Japan, saw the dollar-yen rate return to pre-intervention levels within weeks, suggesting a limited willingness for prolonged market involvement. The recent U.S. action aims to provide a psychological deterrent against further yen depreciation, though JPMorgan's warning about capacity constraints could undermine this effect if traders believe the Treasury can only sustain interventions for a short period.
