Japan and the United States have issued official statements confirming their intervention in the depreciation of the Japanese Yen and indicating the possibility of further measures. The capital markets are closely monitoring the unusual approach taken by the United States in intervening, with the focus on the US dollar and US bonds.
On August 4th, the exchange rate of the Japanese Yen against the US dollar dropped to a low of 157.25, continuing its downward trend. Last week, the Yen had reached a nearly 40-year low against the US dollar, touching 163.73 Yen to 1 US dollar. Following this, the United States and Japan jointly conducted a coordinated intervention to buy Yen for the first time since 1998.
On August 3rd, the Japanese Ministry of Finance confirmed the joint intervention in the foreign exchange market with the United States last week to address the recent excessive and disorderly fluctuations in the Yen exchange rate. They also stated plans to utilize the Foreign and International Monetary Authorities (FIMA) repurchase mechanism of the Federal Reserve in the future.
The US Treasury Secretary, Scott Bessent, previously mentioned that the US and Japan were coordinating their currency interventions to curb the disorderly fluctuations of the Yen. The US expressed willingness to engage in further joint interventions without hesitation. He also called for expanding the support provided by the Federal Reserve to central banks and monetary authorities of other countries in the coming months, describing the FIMA repurchase mechanism as a crucial backing.
The FIMA repurchase mechanism allows foreign central banks (such as the Bank of Japan) to temporarily pledge their holdings of US Treasury bonds as collateral to obtain US dollar liquidity from the Federal Reserve and repay the US bonds with interest at an agreed time (usually overnight or up to 7 days). The maximum borrowing limit per eligible central bank per day is typically $60 billion.
Before the establishment of this mechanism, foreign central banks in need of US dollars would generally sell their US bonds in the open market. Analysts in the industry suggest that Japan, being the largest holder of US bonds, selling them could lead to a decline in bond prices, a rapid increase in bond yields, significantly raising the fiscal financing costs of the United States, and triggering turmoil in global financial markets.
Experts told CNBC that if Japan were to unilaterally intervene in the exchange rate, it would need to sell a substantial amount of US Treasury bonds in exchange for US dollars. This may be one of the key reasons for the US’s involvement.
Louise Loo, the Director of Asian Economics at the Oxford Economic Research Institute, stated, “There is a self-protective factor at play here. Japan’s potentially aggressive fiscal policies could lead to market volatility, which could then impact the US Treasury market, shaking the stability of the US dollar.”
She mentioned that both Tokyo and Washington attach importance to the Federal Reserve’s permanent FIMA repurchase mechanism, which allows foreign central banks to obtain US dollar liquidity without directly selling their bonds, indicating their desire to avoid forced selling as much as possible.
Masahiko Loo, Senior Macro Strategy Analyst at Daifuku Bank, said that the signal of utilizing the FIMA repurchase mechanism is “more important than the intervention itself,” and Washington’s concerns may not be limited to the Yen. The continuing weakness of the Yen could trigger further sales of Japanese government bonds, leading to a trend of rising bond yields that could spread to global bond markets, causing both Japan and the US to face the dilemma of increased long-term borrowing costs.
As of July 30th, the US Treasury Department’s data showed that the total national debt had reached $39.84 trillion. Currently, the debt is growing at a rate of about $12.6 billion per day, expected to surpass the $40 trillion mark before the end of the fiscal year on September 30th. The Congressional Budget Office (CBO) predicts that the net interest expenditure for the 2026 fiscal year will exceed $1 trillion, nearly three times the level in 2020 ($345 billion).
Currently, the US bond market is experiencing severe volatility. Last week, investors heavily sold off long bonds, causing a significant “steepening” of the yield curve. Data shows that the 30-year US bond yield has climbed to a 19-year high, and the 10-year yield is approaching the 5% mark. The unease in the market is believed to have a global impact.
It was reported that Washington’s intervention in the Yen exchange rate involved an uncommon use of the Euro. On July 31st, the New York Federal Reserve Bank, on behalf of the US Treasury Department, sold Euros to purchase Yen, conducting these transactions through Goldman Sachs and Morgan Stanley.
David Forrester, Senior Strategist at Crédit Agricole CIB, mentioned to Bloomberg that the US may not want to be seen as directly selling the dollar. The US continues to pursue a strong dollar policy, aiming to avoid being interpreted as gaining a competitive advantage by weakening its currency, as this would violate the G20 consensus on the foreign exchange market.
Jason Wong, FX Strategist at the Bank of New Zealand in Wellington, stated that the US Treasury Department does not want its intention to “sell the dollar” to be too obvious, hence the use of the Euro as an alternative.