US Treasury Secretary Scott Bessent initiated a rare joint intervention with Japan to support the Japanese yen, which had fallen to nearly 164 yen per US dollar, its weakest since 1986. Bessent described the coordinated action as countering "disorderly yen movements." The US Treasury sold euros from its Exchange Stabilization Fund to purchase yen, an unusual move for the US. This intervention saw the yen retreat 3.5% from its low, settling just under 157 by Monday afternoon US time. The intervention was also aimed at mitigating potential instability in the US Treasury market, as a weakening yen and the resulting carry trade had put upward pressure on Treasury yields, with the 10-year note rising above 4.7% last week.
Bessent also called for an expansion of the Federal Reserve's Foreign and International Monetary Authorities (FIMA) Repo Facility. This facility allows foreign central banks, like Japan, to temporarily lend their US Treasuries rather than selling them to raise dollar liquidity for interventions. The current per-counterpart limit for FIMA is $60 billion per day, and Bessent expressed a desire to see it "upsized." This move would enable Japan to support its currency without selling its substantial holdings of US Treasuries, which amount to approximately $1.1 trillion. Expanding FIMA, however, would require a vote by the Federal Open Market Committee.
The intervention and the push for FIMA expansion are seen as part of a broader strategy to stabilize both the yen and the US Treasury market. The long-standing "carry trade," where investors borrow in low-interest yen to invest in higher-yielding US Treasuries or the US stock market, had contributed to the yen's weakness. The breakdown of this carry trade, as noted by Torsten Slok, chief economist at Apollo Global Management, and the potential for rising Japanese bond yields to spill over into US yields, were key concerns. By supporting the yen and providing a mechanism for dollar liquidity through FIMA, the US aims to prevent these issues from escalating and to ensure continued demand for US Treasuries.
Analysts believe Bessent is also subtly pressuring the Bank of Japan (BOJ) to raise interest rates, a move that would further support the yen and limit contagion from Japanese government bonds. While the BOJ kept rates on hold last week, they signaled a potential hike as soon as their September policy meeting. The market is pricing in nearly a 50% chance of a September hike and about 90% by October. Japanese Finance Minister Satsuki Katayama affirmed Japan's readiness for further coordinated intervention, stating they "will not hesitate to take further action." This joint effort, though unusual, underscores both countries' shared interest in containing currency market pressures and preventing global financial instability.
