The US participated in a joint intervention with Japan to bolster the yen, a move driven by a "self-preservation element" according to analysts. Washington's primary concern was to prevent Japan, the largest foreign holder of US government debt, from being forced to sell large quantities of US Treasurys to fund unilateral yen interventions. Such a sell-off could destabilize the dollar and negatively impact US Treasury markets, which have already seen yields on the 10-year Treasury gain almost 57 points this year.
A significant aspect of the intervention was the emphasis on the Federal Reserve's FIMA repo facility. This facility allows foreign central banks like Japan's to obtain dollar liquidity without having to sell US Treasurys directly. Japan's Finance Ministry's stated plan to utilize this facility for future interventions was seen as a key signal, addressing market concerns that Japanese intervention could otherwise pressure US funding markets through short-term Treasury sales. This move aimed to maximize the signaling effect and leverage existing tools.
Surprisingly, the US reportedly sold euros rather than dollars to buy yen during the intervention. This departure from traditional coordinated interventions, which typically involve dollar assets, raised questions among market observers. Some economists, like Robin Brooks of the Brookings Institution, questioned the mechanics of the US operation, suggesting it could be confusing markets and prove counterproductive. Brooks argued that intervention cannot fundamentally reverse depreciation driven by economic fundamentals and that a stronger yen ultimately requires tighter Japanese monetary policy.
While the intervention may offer a temporary reprieve, analysts like Louise Loo of Oxford Economics and Masahiko Loo of State Street noted that it can only buy time, not alter long-term trajectories. The expectation is that Bank of Japan's monetary policy normalization and hedging flows will be the ultimate determinants of the yen's strength over the next few years. The joint intervention follows reports that Japan may have spent as much as $36.58 billion buying yen during Friday's joint action, with a prior solo intervention by Tokyo reportedly amounting to up to $58.97 billion.
