Coordinated intervention by the US and Japan boosted the yen temporarily, but doubts about its sustainability remain widespread.
US Treasury Secretary Bessent made a rare move last Friday by participating in a joint intervention through selling euros to buy yen, pulling the yen back from a 40-year low. At the same time, Bessent publicly urged the Federal Reserve to expand the little-used FIMA liquidity facility, aiming to allow Japan to raise dollars for future interventions without selling US Treasury bonds. Japanese Finance Minister Katsunobu Kato subsequently confirmed that Japan would use this Fed facility to fund future interventions.
However, analysts warn that without a substantial shift in the Bank of Japan's monetary policy, the effects of this intervention are unlikely to last. More concerning to the market is that a sustained yen strengthening could trigger a massive unwinding of carry trades worth over $1 trillion, potentially impacting global risk assets.
Intervention Details: Selling Euros, Bypassing the Dollar
According to the Wall Street Journal, the US Treasury's intervention last Friday employed a unique method—supporting the yen by selling euros and buying yen, rather than directly selling dollars, thereby avoiding the politically sensitive act of directly weakening the dollar. This intervention lifted the yen from near 164, a 40-year low (the weakest since 1986), to around 157 by Monday afternoon. Japanese Finance Minister Kato stated on Monday that Japan "will not hesitate" to intervene jointly with the US again.
Bessent posted on social media, stating that the coordinated forex action aimed to address "disorderly yen fluctuations" and characterized the US-Japan alliance as embodying "economic security is national security."
Bessent's Public Pressure on the Fed Draws Rare Attention
Another notable aspect of this intervention was Bessent's public call for the Fed to expand the capacity of the "Foreign and International Monetary Authorities Repo Facility" (FIMA Repo Facility). This tool allows foreign governments to borrow dollars from the Fed by using their US Treasury holdings as collateral, without directly selling them in the open market, thereby avoiding pressure on US Treasury yields. Created during the 2020 pandemic, it became a standing facility in July 2021, with a current daily limit of $60 billion per counterparty.
Bessent stated in a post that he would "encourage the expansion of this facility in the coming months." Several Fed watchers noted that it is highly unusual for a Treasury Secretary to publicly comment on a specific Fed tool. Former senior Treasury official Mark Sobel commented, "This is extremely unusual. During my tenure, Treasury Secretaries were very reserved about matters involving Fed monetary operations, even if needed, they would communicate with the Fed Chair privately, not publicly."
Tobin Marcus of Wolfe Research also said, "I can't recall another instance where the Treasury publicly asked the Fed to make such adjustments to its tools, rather than coordinating behind the scenes." It is worth noting that any changes to the FIMA facility's capacity require approval from the Fed's Foreign Exchange Subcommittee, which is part of the Federal Open Market Committee (FOMC), and the entire FOMC must be informed of any planned changes. Bessent's public statement, coming amid ongoing White House pressure on the Fed to cut rates, has further intensified scrutiny of the Fed's independence.
Short-Term Treasury Bills: The Main Ammunition for Past Interventions
According to Citi Research's analysis of the historical relationship between Japan's forex interventions and its US Treasury holdings, since 2024, the Ministry of Finance has systematically used short-term Treasury bills, rather than long-term bonds, as the primary funding source for interventions. Citi estimates based on monthly TIC data show that during the 2022 intervention, Japan's holdings of short-term Treasury bills were about $56 billion, and the MoF at that time chose to sell or let about $75 billion in long-term coupon bonds mature to raise funds. Subsequently, Japan rebuilt its short-term bill holdings. By the 2024 intervention, its short-term holdings had significantly increased, and the MoF sold about $40 billion in short-term bills, leaving holdings at about $60 billion after the intervention ended.
The April 2026 intervention followed the same pattern. By then, Japan's short-term Treasury bill holdings had been rebuilt to about $150 billion, and the MoF sold about $60 billion to support the yen. Latest TIC data as of the end of May shows Japan's short-term Treasury bill holdings at about $90 billion. Citi estimates that the intervention around July 30, worth about $53 billion, was likely primarily funded by selling short-term Treasury bills.
FIMA Facility Limitations: Ceiling Close to Japan's Single-Day Intervention Size
According to Bloomberg, Marco Casiraghi and Gang Lyu, strategists at Evercore ISI, pointed out that the FIMA facility has a clear limitation—the $60 billion daily cap per counterparty is only slightly above the estimated size of Japan's single-day intervention last Thursday. This means the tool's usefulness is significantly diminished if Japan needs to conduct large-scale sustained interventions. Evercore ISI warned in a client note, "We believe focusing on a capped Fed repo facility could be counterproductive—it might instead test the resolve of both the US and Japan to defend the yen once the market realizes that large-scale intervention would require selling US Treasuries."
In practice, the facility is almost idle. According to the latest Fed data, the average balance for the week ending July 29 was only about $6 million, with the last significant use being $3 billion in early February this year. Additionally, the facility's funding cost is relatively high—the interest rate is 3.75%, pricing seven-day funds at the one-week OIS rate plus 25 basis points. Evercore ISI strategists noted that the Fed intentionally set the rate above the cost of funding in private repo markets, suggesting the tool is designed for short-term liquidity support during market stress, not as a regular funding source for ongoing forex intervention.
Intervention Effectiveness Questioned: Monetary Policy is Key
Analysts generally believe that without a fundamental shift in the Bank of Japan's monetary policy, the intervention's effects will be difficult to sustain. Nabil Milali, a portfolio manager at Edmond de Rothschild, stated, "If the Bank of Japan doesn't tighten monetary policy, the yen cannot sustain its upward trend."
Currently, the short-term interest rate differential between the US and Japan is about 2.5 percentage points, and the market widely expects the Fed to cut rates further at its September meeting, which continues to drive investors toward higher-yielding currencies. Robin Brooks, a senior fellow at the Brookings Institution, pointed out an inherent contradiction in the Bank of Japan's policy framework: "On one hand, the Bank of Japan is still buying about 2.5 trillion yen (about $16 billion) in Japanese government bonds monthly, keeping long-term yields low; on the other hand, the Ministry of Finance is intervening in the forex market to boost the yen. The two directions are contradictory."
Goldman Sachs analysts believe that more sustainable support for the yen could come from Japanese domestic investors repatriating overseas assets, which would be "the most powerful long-term policy for influencing exchange rates."
Carry Trade Reversal Risk: Over $1 Trillion in Exposure Hangs in the Balance
This intervention has sparked concerns about a massive unwinding of global carry trades. For a long time, Japan's ultra-low interest rates and weak yen have fueled a massive carry trade—investors borrow low-yielding yen and invest in high-yielding assets like US tech stocks and the Mexican peso. HSBC estimates that the total size of such carry trades is over $1 trillion.
Milali warned, "For decades, the simplest carry trade was to borrow yen at zero interest rates and invest in any high-yielding asset. A large number of investors are clearly still betting on this trade continuing. A reversal in Japanese interest rates and the yen would be a huge risk for these investors."
The unexpected sharp rise in the yen in 2024 caused global market turmoil, forcing investors to unwind carry positions, sell assets, and cover yen shorts. Although the market has reacted relatively calmly to the yen's recent appreciation—the Dow Jones Industrial Average rose 1.3% to a record close of 53,178.41 on Monday, the S&P 500 gained 1.5%, and the Nasdaq Composite rose 2.1%—analysts caution that if the yen strengthens significantly further, the risk of a systematic unwinding of carry trades cannot be ignored.
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