A rare event unfolded in the foreign exchange market from Thursday to Saturday, as the United States and Japan intervened jointly to support the yen. This marks the first time since 1998—during the Asian financial crisis when global fears centered on Japan's financial system collapse—that the two nations have coordinated to buy the yen. The last joint intervention was in 2011 after the Great East Japan Earthquake, but that action involved selling the yen to curb its appreciation. The current intervention, 28 years in the making, was prompted by a Reuters photographer capturing U.S. Treasury Secretary Steven Mnuchin's notebook, which listed "To-do: Buy yen 5-10 billion." The New York Fed, operating through Goldman Sachs and Morgan Stanley, sold euros and bought yen. Japan's Ministry of Finance estimated the intervention size at around 6-7 trillion yen. Japanese Finance Minister Yoshihiko Noda officially announced on August 3, "We will not hesitate to take further joint intervention in the currency market." Mnuchin also stated on social media, "We will not hesitate to participate in further joint interventions." The effect was immediate. The yen, which hit a nearly 40-year low of 163.99 on July 23, surged to 155.20, appreciating over 5% in a week. By August 3, the dollar-yen rate stood at 156.46. For financial markets, the yen's appreciation always stirs investor nerves, even if temporary.
Why is the yen so weak? Traditional economics suggests that interest rate hikes strengthen a currency. The Bank of Japan (BOJ) exited negative rates in March 2024 and raised rates to 1% by June, the highest since 1995. Meanwhile, the Federal Reserve was cutting rates, narrowing the US-Japan policy rate differential from over 4 percentage points to about 275 basis points. The yen should have strengthened, but it didn't. In late July, the dollar-yen rate approached 164, a low not seen since 1986. The metal value of a 10-yen coin even exceeded its face value. This anomaly, while not illogical, stems from the 275 basis point yield gap, which continues to attract capital to the US. Borrowing yen at under 1% and converting to dollars for US bank deposits or Treasury bonds yields a risk-free return of over 3.5%, plus potential currency gains from further yen depreciation—a highly attractive trade, provided the yen doesn't appreciate significantly. The deeper issue is waning market confidence in Japan. The government of Prime Minister Yoshihide Suga pursued expansionary fiscal policies, including tax cuts and increased infrastructure spending, and in June, weakened fiscal consolidation targets while establishing a new industrial investment framework with no annual spending cap. Market pricing logic has shifted: rising Japanese government bond (JGB) yields are now interpreted not as a sign of economic recovery and monetary tightening, but as investors demanding higher risk premiums to hedge against expanded bond supply and debt sustainability concerns. The yen and JGBs are falling together, a unique phenomenon among major global currencies. Compounding structural issues—Japan's aging population, declining industrial competitiveness, over 90% energy import dependency, and a widening trade deficit to 406.9 billion yen in June—remain unresolved. The BOJ faces a dilemma: raising rates would inflate interest payments on the 260% debt-to-GDP ratio, while not raising rates would perpetuate the yen's depreciation trend. At its July 31 meeting, the BOJ voted 8-1 to maintain the 1% rate, with the sole dissenting vote favoring a hike to 1.25% but being rejected. The market interpreted this as the central bank being unwilling to act. Consequently, global capital is aggressively betting on yen depreciation. CFTC data shows that hedge fund net short yen positions have reached their highest level since 2007. Foreign exchange derivatives pricing suggests a 72% probability of the dollar-yen rate reaching 165 by June 2027. For equity markets, the scale of carry trades is a more concerning factor. BCA Research estimated in February that the August 2024 carry trade unwinding only covered 10-15% of total positions, with the remainder rebuilt over the subsequent half-year to three times the original size. That number—three times—is worth remembering.
The Summer 2024 Crash Historically, such interventions have short-term effectiveness but limited long-term impact. However, for financial markets, short-term effects suffice. Many recall the summer of 2024. The yen began appreciating in early July, and on July 31, 2024, the BOJ unexpectedly raised rates from 0-0.1% to 0.25%. The same day, US non-farm payrolls data missed expectations, with July employment growth of 114,000, far below the 175,000 forecast. These two events combined, triggering a market realization that the US-Japan rate differential would narrow, accelerating yen appreciation. This led to "Black Monday" on August 5, when the Nikkei 225 plunged 12.4%, its largest single-day drop since 1987, triggering two circuit breakers. South Korea's KOSPI fell 8.77%, also triggering a circuit breaker and a 20-minute trading halt. The US stock market nearly collapsed in overnight trading, though it recovered later. The core mechanism was simple: the yen appreciated from 162 in early July to 142, an 11% monthly gain. Institutions that borrowed yen to buy US stocks faced currency losses exceeding interest gains, prompting them to sell stocks and repurchase yen to repay loans. This created a death spiral—selling triggered further declines, which in turn led to more selling. Japan Exchange Group data showed that foreign investors net sold 1.56 trillion yen in Japanese stocks and futures in the week ending July 26. CFTC data indicated that non-commercial net short yen positions fell 84.5% in the first week of August 2024. Within a week, over 80% of speculative carry trade positions were liquidated. This illustrates the yen's destructive power: its appreciation triggers a global deleveraging event, forcing capital borrowed in yen to buy global assets to rush back. The August 2024 wave involved carry trade positions only one-third the size of current levels.
What if the yen reverses course again? This time, the US Treasury Department is directly involved, with the New York Fed operating through Goldman Sachs and Morgan Stanley. A reserve currency issuer engaging in currency intervention carries significant symbolic weight beyond the operation itself. Mnuchin and Noda are aligned in their commitment to "intervene without hesitation," signaling a consensus that the yen cannot fall further. While historical experience suggests limited long-term efficacy, short-term effects are notable. The market is now far more crowded than in 2024, with carry trade positions three times larger. If the yen transitions from depreciation to appreciation, the unwinding pressure would also be three times greater. The August 2024 wave saw the Nikkei drop over 20% in a week. With triple the position size, the potential impact is staggering. There is a buffer: the 2024 crash was compounded by a US recession trade triggered by weak non-farm payrolls data, absent a pure carry trade unwinding. However, a new variable exists: South Korea's KOSPI just experienced its eighth circuit breaker this year, with SK Hynix falling 35% in two months. The global semiconductor sector has already undergone a correction, leaving market sentiment fragile. If the yen appreciates further, combined with existing semiconductor deleveraging, a chain reaction could occur: yen appreciation triggers carry trade unwinding, pressuring US tech stocks, reducing risk appetite, causing global tech stocks to decline, and furthering semiconductor deleveraging. South Korea's current situation is reminiscent of China's summer of 2015, which experienced two waves of deleveraging. Investors should be wary of this yen risk spillover. The yen, as the world's largest carry trade currency, signals a repricing of global liquidity. This is not merely a currency issue, but a change in the global financial landscape.
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