US Joins Japan in Yen Intervention, Driven by Strategic Interests

The United States and Japan recently engaged in their first joint market intervention to support the Japanese yen in 13 years, a move analysts suggest is strategically motivated by three key U.S. interests: defending U.S. Treasury bonds, maintaining a strong dollar, and preventing the depreciation of the Chinese yuan.

While former U.S. President Donald Trump characterized the joint intervention as a "sign of friendship," the action appears to serve distinct American economic objectives. The U.S. Treasury and Federal Reserve are estimated to have intervened by purchasing 5 billion to 10 billion dollars worth of yen on May 31st. This followed earlier, larger interventions by Japan alone, totaling approximately 8.45 trillion yen (about $52.8 billion) in April-July 2024 and 48.4 billion dollars in April-May 2024.

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The U.S. Treasury's intervention in the spot market was unusually conducted by selling euros to buy yen, which is assessed as a purpose to prevent it from being seen as a signal of dollar weakness.

A primary concern for the U.S. is the potential rise in Treasury bond yields if Japan, needing dollars for intervention, were to sell its substantial holdings of U.S. debt. To mitigate this, the U.S. and Japan agreed to utilize the FIMA (Foreign Official Institutions) repo facility. This mechanism allows foreign central banks to borrow dollars from the Federal Reserve using U.S. Treasuries as collateral, thus providing Japan with dollar liquidity without forcing it to sell its U.S. bond holdings and potentially destabilize yields.

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The U.S. government's official stance of 'strong dollar' means they did not want to give a weak dollar signal, or they were wary of the potential risk of triggering actual dollar weakness.

Furthermore, the U.S. Treasury's intervention method was notable: it sold euros to buy yen, rather than dollars. This approach aimed to avoid signaling dollar weakness, which would contradict the U.S.'s official policy of maintaining a strong dollar. Investment bank JPMorgan suggested this was done to prevent the perception of dollar depreciation or to actively avoid triggering it.

Additionally, by selling euros instead of dollars, the U.S. may also be seeking to deter Chinese authorities from intervening in the foreign exchange market by selling the yuan. Nomura Securities noted that U.S. intervention in its own currency could provide China with a justification for its own currency interventions. Major global investment banks view the joint commitment as unusually strong, anticipating the yen-dollar exchange rate to fluctuate between 155 and the low 160s in the short term, with 155 yen acting as a support level.

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It appears to be to avoid a situation where the U.S.'s intervention by selling its own currency (dollar) is used by China as a reason for intervention by selling the yuan.