On July 31, the coordinated yen-buying intervention by U.S. and Japanese authorities was executed after approximately nine months of discussions. The Yomiuri Shimbun reported on August 4 that U.S. Treasury Secretary Scott Vesent proposed a method for dollar procurement to Japan last October, allowing for intervention funding without selling U.S. Treasury bonds. Japan plans to continue securing funds for yen-buying interventions using this method.
The Japanese government initiated a solo yen-buying intervention on July 30, followed by a coordinated effort with the U.S. on July 31. On August 3, the yen-dollar exchange rate fell to as low as 155.20 yen per dollar, marking the highest value of the yen in about three months since early May. The exchange rate, which had risen to the upper 163 yen range at the end of last month, dropped by about 8 yen after the intervention began on July 30. The Nihon Keizai Shimbun (Nikkei) reported that there were speculations of additional interventions by Japanese authorities on the morning of August 3, indicating a third consecutive day of intervention.
Japanese Finance Minister Katsunobu Kato officially announced the coordinated intervention on August 3, stating, "We will not hesitate to conduct further coordinated interventions in the future." Jun Mimura, a senior official at the Ministry of Finance, remarked that this coordinated intervention represents the completion of the U.S.-Japan currency alliance. This marks the first coordinated intervention since the Great East Japan Earthquake in 2011 and the first yen-buying intervention since the Asian financial crisis in 1998. Historically, such measures have been limited to times of crisis, but a senior official from the Ministry of Finance noted, "Economically, we are in a normal period now. Conducting coordinated interventions even outside of crisis situations is the new standard."
The foundation for U.S.-Japan coordinated interventions was established in a joint statement issued by the two countries' finance ministers in September of last year, which stated that they would not rule out intervention if exchange rates moved excessively or disorderly. Practical coordination began shortly thereafter. Secretary Vesent proposed a method for procuring dollars using Japanese-held U.S. Treasury bonds during his first meeting with Finance Minister Kato in October. According to the Yomiuri, a Japanese government official viewed this as a proposal aimed at future U.S.-Japan coordinated interventions. This method utilizes the Federal Reserve's "repo facility for foreign and international monetary authorities," allowing for borrowing dollars needed for intervention without selling U.S. Treasury bonds in the market.
The first major challenge occurred in January of this year when a simultaneous sell-off of the yen and Japanese government bonds, termed "Japan sell-off," prompted Secretary Vesent to consider coordinated intervention, according to Nikkei. An American official stated, "If there had been a request from Japan, coordinated intervention could have occurred at that time." However, the announcement of the dissolution of the House of Representatives by Prime Minister Sanae Takaichi created a political vacuum, leading to the intervention being shelved. Instead, the U.S. conducted a "rate check" by inquiring financial institutions about the exchange rate levels, signaling its willingness to intervene, which resulted in a roughly 5 yen drop in the yen-dollar exchange rate over five days. Final coordination for the coordinated intervention began when Secretary Vesent visited Japan alone in May to meet with Finance Minister Kato and Prime Minister Takaichi.
The U.S. could not overlook the excessive weakness of the yen. A weak yen could exacerbate the strength of the dollar, diminishing the price competitiveness of U.S. manufacturing. A greater concern was interest rates. In Japan, long-term interest rates rose to 2.9%, the highest in nearly 30 years, due to fiscal instability, while U.S. 30-year Treasury bond yields reached around 5.2%, the highest in nearly 19 years. Nikkei reported that U.S. authorities were wary of a chain reaction from rising Japanese interest rates affecting the U.S. Treasury market. Even if Japan sold a large amount of U.S. Treasury bonds to secure intervention funds, the outcome would be the same. The Fed's repo facility was a compromise that supported yen defense while minimizing the shock to the U.S. Treasury market.
According to Nikkei, during the coordinated intervention on July 31, the U.S. sold euros to buy yen in response to Japan's dollar selling and yen buying. This approach allowed the U.S. to avoid impacting the U.S. bond market by not selling dollars and to prevent the intervention from appearing as a move to weaken its own currency. It sent a signal to the market that the U.S. was not changing its dollar policy but rather assisting in correcting the yen's weakness.
The scale of the funds mobilized was also unprecedented. Asahi Shimbun estimated that the intervention by the Japanese government and the Bank of Japan on July 31 amounted to 5 to 6 trillion yen. Nikkei reported that based on the Bank of Japan's forecast for current account balances released on August 3, estimates suggest an intervention of around 5 trillion yen. It is also estimated that approximately 6 trillion yen was injected the previous day, bringing the total over two days to potentially 11 to 12 trillion yen, comparable to the 11.7349 trillion yen Japan injected over a month in April and May of this year.
This coordinated intervention targeted speculative forces such as hedge funds. The timing was calculated, as a Japanese government official noted, "Investors are going on vacation, making this an effective time for intervention." They aimed to capitalize on reduced trading volumes that could lead to significant fluctuations in the exchange rate.
There is another consideration. The market has long held the belief that the effects of yen-buying interventions do not last long. While selling yen can easily generate funds through the issuance of government short-term securities, buying yen requires selling U.S. Treasury bonds or other assets to procure dollars, which limits foreign currency reserves. However, the premise has changed this time. Japan can continuously secure funds through the Fed's repo facility. The U.S. also sold euros this time, but if it were to sell dollars as well, there would effectively be no limit to the intervention funds. Rinto Maruyama, a senior interest rate and foreign exchange strategist at SMBC Nikko Securities, stated, "If the U.S. sells dollars to buy yen, it could intervene indefinitely, making the possibility of further yen appreciation undeniable." This has made accumulating short positions on the yen more burdensome.
However, it remains uncertain whether intervention alone can completely reverse the trend of a weak yen. Kenji Yamamoto, chief market economist at Daiwa Securities, predicted, "Yen-buying interventions only buy time to suppress the progression of a weak yen; they do not change the trend itself," adding that the effects are unlikely to last long. The U.S. may next target the Bank of Japan for pressure. Secretary Vesent expressed hope on X (formerly Twitter) on July 31, the day the Bank of Japan decided to maintain its policy interest rate, to meet with Bank of Japan Governor Kazuo Ueda at the G20 finance ministers and central bank governors meeting at the end of August. Daisuke Inoue, a senior analyst at Mitsubishi UFJ Bank, noted, "The likelihood of the previously anticipated September interest rate hike scenario has increased."
* This article has been translated by AI.
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