US and Japan intervene in yen, raise dollar liquidity concerns

Last week the United States and Japan carried out a coordinated currency intervention to support the yen after it slid to about 164 per dollar. Officials described the operation as the first joint intervention since 1998. The New York Federal Reserve sold euros on behalf of the U.S. Treasury’s Exchange Stabilization Fund rather than selling dollars directly.

U.S. Treasury Secretary Scott Bessent wrote that he plans to meet Bank of Japan Governor Kazuo Ueda at the G20 finance ministers meeting at the end of August and described the relationship as “strong” and coordinated. He urged widening access to the Federal Reserve’s Foreign and International Monetary Authorities repo facility, known as FIMA, as a backstop for dollar funding.

The FIMA repo lets foreign institutions obtain dollars from the Federal Reserve using U.S. Treasuries as collateral. Expanding the facility would raise the supply of dollars held outside the United States without forcing direct sales of Treasury securities, which market participants say could push U.S. yields higher if used widely. Bessent wrote, “The FIMA Repo Facility is an important backstop. We would encourage it to be upsized in the coming months.”

Analysts said the operation coincides with a shift in Japan’s domestic markets. Japanese two-year yields rose above 1.57 percent on Monday, a move analysts view as part of a change away from decades of very low rates. Higher domestic yields and government spending have made yen-funded carry trades less attractive and prompted some investors to repatriate funds.

Market participants warned that an unwind of the yen carry trade could remove dollar liquidity from global markets. Large holders of U.S. Treasuries such as Japan selling or swapping collateral at scale could raise borrowing costs for the U.S. government, corporations and consumers if dollar funding strains appear.

Cryptocurrency traders and other investors are monitoring funding conditions because rapid repatriation of capital can tighten short-term dollar funding. Some market participants noted that stress in Treasury or dollar funding markets could have spillover effects for Bitcoin and other risk-sensitive assets.

Economist Mohamed El-Erian argued the outcome depends on policy coordination in Tokyo, writing that the effort “hinges on a comprehensive policy alignment in Tokyo among the Bank of Japan, the Ministry of Finance, and the Prime Minister’s Office.” Officials and market participants will watch upcoming meetings between U.S. and Japanese officials for further coordination and any changes to dollar liquidity facilities.