For the first time in decades, the United States and Japan have jointly intervened in the foreign exchange market, a move ostensibly aimed at stabilizing the yen but revealing Washington's deeper anxiety over the stability of the U.S. Treasury bond market. Analysts suggest that the core logic behind U.S. participation in this coordinated intervention is to prevent Japan from being forced to sell off large amounts of U.S. Treasury bonds to raise intervention funds, a scenario that could impose an unbearable impact on long-term U.S. bond yields.
This joint U.S.-Japan intervention marks the first time the two countries have bought yen together since 1998 and the first coordinated action at the G7 level in over a decade, following the 2011 Great East Japan Earthquake. The yen had previously fallen to near four-decade lows, touching 163.73 per dollar last Thursday. After the intervention news broke, the yen quickly rebounded to 157.57. Former President Donald Trump stated that U.S. involvement was a show of support for Japan and a move to maintain global economic stability.
The market reacted sensitively to the news. Several analysts warned that if Japan were forced to intervene unilaterally and had to sell U.S. Treasury bonds to raise funds, the long end of the U.S. Treasury yield curve would face additional pressure. This year, the yield on the 10-year U.S. Treasury note has already risen by nearly 57 basis points. The U.S. and Japanese finance ministries' strong emphasis on the Fed's FIMA repo facility is interpreted as a critical signal of both sides' efforts to avoid the worst-case scenario of a "forced sell-off of U.S. Treasury bonds."
Preventing a U.S. Bond Sell-Off: Washington's Core Concern
Analysts believe the key factor driving the rare U.S. intervention is that Japan is the largest foreign holder of U.S. Treasury bonds. If Japan's Ministry of Finance were to enter the market unilaterally to buy yen, the necessary dollar funds would typically come from selling U.S. Treasury bonds held in its foreign exchange reserves. Louise Loo, Head of Asia Economics at Oxford Economics, said this "might be" one of the core reasons for U.S. participation. "There is an element of self-preservation here. If Japan takes potentially aggressive fiscal policy actions that trigger market turmoil, it could spill over into the U.S. Treasury market and destabilize the dollar."
Masahiko Loo, Senior Macro Strategist at State Street Bank, further noted that the Japanese Ministry of Finance's announcement of plans to use the FIMA repo facility for future intervention might be "more significant than the intervention itself." He explained that the FIMA tool allows foreign central banks to obtain dollar liquidity without directly selling U.S. Treasury bonds, sending a clear signal to the market that Japan does not need to sell Treasuries to raise intervention funds. "Highlighting the availability of the FIMA repo facility shows the market that Japan can obtain dollar liquidity without selling U.S. Treasury bonds... It eliminates concerns that the Ministry of Finance's intervention could pressure U.S. funding markets by selling short-term U.S. Treasuries. It's an attempt to maximize the signaling effect within the existing framework."
Spillover Effects: The Contagion Risk Between Japan's Bond Market and Global Bond Markets
Washington's concerns extend beyond the yen itself to the broader risk of contagion in bond markets. Masahiko Loo pointed out that the yen's persistent weakness could trigger further selling of Japanese Government Bonds (JGBs), pushing up JGB yields, and potentially spill over into global bond markets, especially as both the U.S. and Japan face rising long-term borrowing costs. Louise Loo added that if Washington believes Japan's fiscal policy is pushing up JGB yields and weakening the yen, coordinated intervention could buy time for the Bank of Japan (BOJ) to resume raising interest rates later this year. She emphasized that a fundamental strengthening of the yen requires tighter monetary policy, not repeated market intervention.
Vishnu Varathan, Head of Macro Research for Asia (ex-Japan) at Mizuho Securities, said U.S. participation has "amplified" the effectiveness of this intervention. The involvement of the U.S. Treasury and the Federal Reserve gives the market more reason to believe authorities are prepared to act again if necessary. Both governments' warning that they will "not hesitate" to intervene again further strengthens the deterrent against speculative yen shorting.
Questions and Skepticism: Doubts Over Intervention Effectiveness, Technical Moves Cause Confusion
While the market has responded positively to the policy intent of the intervention, analysts remain cautious about its actual effectiveness. Adding to market confusion, reports indicate that the U.S. sold euros, not dollars, to buy yen, deviating from the norm of coordinated interventions typically funded with dollar assets. Robin Brooks, a Senior Fellow at the Brookings Institution, strongly questioned this, saying it "confuses the market and will ultimately be counterproductive." He stated, "On the surface, it might give the impression that the intervention is more powerful than before, but U.S. participation raises more questions than answers, especially this very strange move of selling euros to buy yen."
On deeper structural issues, Brooks clearly stated that intervention cannot reverse the yen's depreciation trend driven by the Japanese bond market. He believes that although the BOJ officially ended its yield curve control (YCC) in March 2024, it continues to purchase large amounts of JGBs, effectively keeping borrowing costs below what a free market would determine. Under these circumstances, the yen still faces downward pressure. Masahiko Loo also acknowledged the limitations of the intervention: "Intervention might influence trends over the next few months, but the BOJ's monetary policy normalization process and hedging capital flows are the real variables determining long-term trends." Analysts warn that unless Japan addresses the structural factors driving yen weakness, this coordinated action may not last longer than previous interventions.
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