Ouyang Xiaohong/Text

Can the cursed Japanese yen be revived?

On August 2, 2026, Nihon Keizai Shimbun released a message on the authentication X (social media) account: Japan and the United States have implemented the first coordinated intervention in 15 years, and Japanese Finance Minister Takumi Katayama will officially explain on August 3.

On July 31, two days ago, the official account of the Ministry of Finance of Japan issued a document saying that the Japanese monetary authority has a wide range of tools to respond to market liquidity needs, including the use of the permanent foreign and international monetary authority repurchase facility (FIMA Repo Facility) of the Federal Reserve to obtain temporary dollar liquidity with US treasury bond bonds (hereinafter referred to as "US bonds") as collateral. The Japanese side has expressed its readiness to use existing tools as necessary to support the orderly operation of the market.

Prior to this, the market had already seen traces of transactions. On July 30th, the exchange rate of the US dollar against the Japanese yen opened at 163.38, a high in nearly 40 years, and then sharply declined, dropping to a low of 157.94 and closing at 159.55, a decrease of 2.38%; The next day, the US dollar fell 1.29% against the Japanese yen, closing at 157.49. It is estimated that Japan may have used up to about 8.2 trillion yen; The photos taken by Reuters show that US Treasury Secretary Scott Besant clearly marked the operation of "buying 5 billion to 10 billion yen" on a note during the cabinet meeting at Camp David. This may confirm Washington's involvement.

This time, a savior has appeared on the buying side of the yen, but will the market mechanism change as a result?

Like previous joint operations, there will definitely be good results in the short term, "said Song Ke, Dean of the School of International Finance at Renmin University of China

The last time Japan and the United States intervened in the foreign exchange market was in 2011, when the G7 took joint action to prevent the abnormal appreciation of the yen after the earthquake and sold the yen; If the aforementioned memo transaction is officially confirmed, it will be the first time since 1998 that the United States has directly entered the market to buy Japanese yen. At that time, the United States and Japan jointly bought Japanese yen to address the rapid depreciation of the yen and the fragility of Japan's financial system during the Asian financial crisis.

What is the intention behind the fate of the United States?

One

Bessent's words and actions demonstrate the urgency of the issue.

On July 30th, Beckett sat in front of the Fox Business Channel camera and said a few words that carry significant weight in the history of currency. The US Treasury Secretary, who has frequently intervened in Japan since taking office, said, 'In my opinion, the yen is severely undervalued.' 'Excessive yen volatility is not healthy,' and the yen has' significantly crossed the so-called equilibrium level. '. He also said that Japan is implementing "powerful policies" that are beneficial to Japan's fundamentals.

The next day, the Japanese yen appreciated by over 1% against both the US dollar and the euro.

The statement by the US Treasury Secretary, coupled with an uncommon intervention or implication of an upward boundary for the US dollar to Japanese yen exchange rate, is no longer solely determined by Japan's foreign exchange reserves and the Bank of Japan for the first time.

Under the shock of the exchange rate crisis, a multi country micro defense line has quietly unfolded: on the one hand, there are reports that the New York Federal Reserve, as an agent of the US Treasury Department's Foreign Exchange Stabilization Fund, sells euros and buys yen through Goldman Sachs and Morgan Stanley. This is the first time in 28 years that the United States has participated in buying Japanese yen through direct trading.

On the other hand, the Japanese Ministry of Finance, in a rare move to authenticate X accounts, first called out in English to the market, stating that they could take advantage of the Federal Reserve's repurchase facility - using their held US bonds as collateral to exchange for temporary US dollars, and then selling US dollars and buying Japanese yen to avoid direct selling of US bonds. This move will not amplify the effect of intervention out of thin air, but only change 'where does the US dollar come from'.

In the view of Wang Yongli, former deputy governor of Bank of China, it is normal for a country's monetary authority to intervene in the market when exchange rate fluctuations exceed expectations, but Japan's previous unilateral intervention has not achieved lasting results. It is indeed rare for the joint efforts of the US Treasury Department and the Japanese Ministry of Finance to be carried out separately by the New York Fed and the Bank of Japan. After all, the United States also does not want to see a disorderly rise in the exchange rate of the US dollar against the Japanese yen.

Even with joint intervention from the United States and Japan, the future direction of yen depreciation cannot be changed. What changes are only the pace and speed of the depreciation process, "said a Japanese researcher." Because in the foreseeable next two to three years, Japan will not be able to recover liquidity at all

He believes that the yen's predicament is not simply a matter of the US Japan interest rate differential, but rather a backlash against the extremely loose monetary policy implemented by Abenomics over the past decade.

The limitations of Japan's individual intervention have long been apparent. In April and May of this year, the Japanese government spent a total of about 11.7 trillion yen to support its currency, but the exchange rate of the US dollar against the Japanese yen quickly rose after a brief decline, breaking through the 160 mark and approaching 164 at its highest.

When the market sees through the weakness of Tokyo's inability to fundamentally tighten policies, shorting the yen constitutes a self reinforcing loop. And 'interrupting the self circulation of unilateral depreciation' may become the first consideration for the Fed's forced exit.

The second consideration is to prevent pressure from spreading to the Asian exchange rate system. The third level of consideration points to US Treasury bonds. If the intervention becomes long-term and the scale continues to expand, Japan, as the largest foreign holder of US bonds, may reduce its allocation of new US bonds and even sell some of its existing US bonds.

Coincidentally, with US long-term bond yields at high levels, Washington is unwilling to see Japan's yen defense war, which in turn has become another selling force in the US bond market.

In my article "The Curse of the Japanese Yen, How to Redemption Japanese Debt" in June, I pointed out that the issue of Japan's exchange rate and bond market is no longer just a domestic issue in Tokyo, but is becoming a part of Washington's fiscal financing and the stability of the US bond market.

Two

When Tokyo and Washington join hands as rescuers, will they save the Japanese yen or the US dollar order?

The answer is probably that what is bought on the trading platform is Japanese yen, and the policy is to maintain the transmission order of the US dollar system.

On July 31, the yield of 10-year Japanese treasury bond (hereinafter referred to as "Japanese bonds") was about 2.80%; On July 30th, the yields of 20-year, 30-year, and 40 year Japanese bonds were approximately 3.67%, 3.97%, and 4.03%, respectively. Although the yield of 40 year Japanese bonds did not exceed the extreme value of 4.355% in May, the problem facing Japan now is that the pressure is no longer limited to the ultra long end, and the 10-year yield has also been pushed to the vicinity of 3%.

This means that the yield curve of Japanese bonds is being pulled by different forces: at the short end, it is constrained by expectations of interest rate hikes from the Bank of Japan; Starting from the 10-year Japanese bonds, inflation, supply, and policy credit will be included simultaneously; 30 year and 40 year Japanese bonds continue to require a fiscal risk premium; However, the Japanese yen did not receive stable support due to the rise in Japanese bond yields.

Analysis suggests that generally speaking, an increase in bond yields improves monetary attractiveness; Now there is a situation where Japanese bonds are falling and the Japanese yen is also falling. This may be a warning signal that fiscal credibility is beginning to override the logic of interest rate differentials - what the market is seeing is no longer 'Japan's interest rates have finally normalized', but 'Japan must pay higher interest rates to allow people to continue holding its debt'.

The Bank of Japan raises interest rates, the Ministry of Finance sells US dollars to buy Japanese yen, and the Bank of Japan continues to raise Japanese bonds are Japan's three self rescue methods.

The entry of the United States is equivalent to adding a fourth method from the outside: sharing Japanese yen buying with Washington and using US dollar liquidity arrangements such as "foreign and international monetary authorities repurchase facilities" to avoid Tokyo selling US bonds to save the exchange rate as much as possible.

And the United States may not be able to withstand the impact of rising long-term interest rates. On July 31st, the yield of 10-year US Treasury bonds rose to 4.743%, and the yield of 30-year US Treasury bonds rose to 5.274%, the highest level in 19 years. On that day, the rise in US bond yields was accompanied by news of Japanese yen intervention. The voiceover is that Tokyo needs the US dollar to save the Japanese yen, but Washington needs Japan not to sell US bonds.

What the United States truly cares about is the credit order of US bonds as the global core collateral, the global leverage order based on yen financing and US dollar asset allocation, and the relative order of Asian exchange rates revolving around the US dollar. In short, the joint intervention of the United States and Japan is due to the fact that the Japanese issue has escalated into a problem of the US dollar system.

Now, the exchange rate of the Japanese yen against the US dollar has fallen to a low of about 40 years, which has also affected import inflation, US Treasury bonds, and Asian exchange rates, leading to another coordinated intervention by the US and Japan in the foreign exchange market.

Can intervention change the direction of the yen? An investment banker said that while it may be effective in the short term, if we look at it over time, the key is Japan's fiscal stimulus.

Zhang Bin, Deputy Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, believes that if such a practice exists, it will affect prices. The exchange rate decision already involves multiple forces such as the market and policies, and it still depends on the intervention methods and communication with the market.

The judgment of senior international finance researcher E Zhihuan is that the background of this coordinated intervention is the significant depreciation of the Japanese yen, which has impacted market confidence, making it difficult for the Bank of Japan to sustain itself, and pushing up US dollar bond yields, disrupting the pace and effectiveness of the Federal Reserve's monetary policy. From previous interventions, it can be seen that in the short term, it may push the yen to bottom out and rebound, entering a period of volatile adjustment. However, it cannot change the medium-term trend of yen depreciation, and the probability of a reversal in interest rate arbitrage is not high. In the foreseeable future, as US monetary policy tightens and the Bank of Japan is cautious about raising interest rates, the Japan US interest rate differential remains the main factor affecting the Japanese yen exchange rate. In addition, the huge Japanese yen short positions accumulated in the current international market may amplify the market impact of unexpected factors.

However, the United States can provide Japan with yen buying and dollar liquidity, but cannot rebuild Japan's fiscal credibility. Some analysts believe that even if the United States and Japan join forces, they cannot eliminate the structural pressure of long-term depreciation of the yen with just a few foreign exchange transactions. The first thing that coordinated intervention changes is the pace, speed, and speculative cost of depreciation. In the next two or three years, although the Bank of Japan can continue to shrink its balance sheet, it is difficult to recover the huge amount of liquidity formed by over 10 years of ultra easing quickly, because treasury bond, finance and financial systems have deeply adapted to the low interest rate environment.

But the yen exchange rate is a marginal price, and there is no need to wait for all of this liquidity to exit before it can turn: as long as the US Japan interest rate differential narrows and the carry trade reverses, the yen may still experience a significant period of appreciation.

Coordinated intervention between the United States and Japan may not change the underlying weakness of the yen, but it may change the market belief that the yen can only depreciate unilaterally. This may be more worth questioning than the direction itself.

(Author Ouyang Xiaohong)