Last Friday, Japan spent a whopping $34 billion to rescue the yen! This round of intervention may set a new monthly record.

According to an analysis of data from the Bank of Japan's accounts, Japanese authorities may have intervened in the foreign exchange market last Friday by investing approximately $34 billion to support the yen. This action was taken in coordination with the United States and followed the Japanese authorities' actions from the previous day. Based on the account data released by the Bank of Japan on Monday and comparisons with forecasts from currency brokers, the scale of the intervention last Friday is estimated to be around 5.33 trillion yen (approximately $34 billion). This action occurred after the Japanese government had injected about 8.45 trillion yen to support the yen the day before potentially marking the largest single-day foreign exchange intervention in Japan's history. If confirmed, this will set a new monthly record for the latest round of foreign exchange interventions by Japan. Previously, within the short period during the Golden Week holiday starting at the end of April, Japanese authorities had briefly bought yen to provide temporary support, totaling 11.73 trillion yen, the highest monthly intervention scale on record. The U.S. Treasury also joined the effort to support the yen, signaling the closest coordination between the U.S. and Japan in monetary policy in the past 15 years. An analysis of the Bank of Japan's accounts does not reveal the scale of U.S. intervention in the market, but American involvement may have reduced the amount of capital Japan needed to deploy to achieve a similar impact on the exchange rate. Japanese Finance Minister Katsunobu Kato confirmed that the government indeed intervened in the foreign exchange market last Friday. U.S. Treasury Secretary Janet Yellen stated that the U.S. does not rule out the possibility of intervening in the market again, and President Trump expressed support for this intervention, calling it a "sign of friendship." The enhanced coordination between the U.S. and Japan stems from earlier signals from U.S. officials expressing concern over the trend of yen depreciation. A semiannual report released by the U.S. Treasury last month noted that the yens prolonged depreciation "has led to a serious undervaluation of the yen." The report also stated that normalizing monetary policy would help stabilize inflation expectations and reduce excessive exchange rate fluctuations. Meanwhile, the most notable aspect of this intervention is not just Japan's re-engagement, but that the U.S. has upgraded from "verbal support" to "real financial involvement." On July 31, the U.S. Treasury entered the market through the New York Fed, selling euros to buy yen. Some analysts suggest that stabilizing U.S. Treasury bonds may be "one of the key reasons" behind U.S.-Japan coordination in intervening in the foreign exchange market to support the yen. Japan is the largest foreign holder of U.S. Treasury bonds, with holdings exceeding $1.1 trillion. If the yen continues to depreciate uncontrollably, Japanese authorities would be forced to sell U.S. Treasury bonds on a large scale to procure intervention funds, which would directly drive up already high yields on long-term U.S. Treasury bonds10-year Treasury yields have increased by nearly 57 basis points this year, impacting U.S. fiscal and financial stability. Additionally, the timing of the U.S.-Japan joint intervention is noteworthyit coincided with the Federal Reserve's decision to maintain interest rates and Chairman Powell's remarks, which were interpreted by the market as dovish. Economists at TSLombard pointed out that the Fed's dovish stance created a favorable opportunity for the Japanese Ministry of Finance to implement intervention. The U.S. also hopes to lower the dollar's exchange rate to provide liquidity support for the stock market, creating a policy resonance with Japan's goal of raising the yen's value. Nobuyasu Atago, chief economist at Rakuten Securities and former Bank of Japan official, remarked, "I can't help but feel that they are considering not only coordination in exchange rates but also tacit cooperation in monetary policy." Prior to the intervention by Japanese authorities last week, the yen was nearing 164 yen to the dollar, a level not seen since 1986. Over the past week, following the joint intervention by Japan and the U.S., the yen has rebounded. As of the time of writing, the exchange rate is 156.97 yen to the dollar. Earlier today, the yen briefly rose to around 155.23 yen to the dollar. It remains unclear whether Monday's movement of the yen represents the beginning of a new round of intervention, or if it is a reaction to market anxiety and algorithmic trading platforms responding to relevant news. Traders are currently keeping a close watch on whether further joint actions will occur in the future, and market expectations regarding the possibility of the Bank of Japan raising interest rates as early as September are rising. Furthermore, the market is turning its attention to the quarterly report on foreign exchange market interventions to be released by the Japanese Ministry of Finance this Friday. This report will detail the daily market operations conducted from April to June. These data might provide new insights for investors regarding how Japanese authorities manage the timing of interventions and attempt to outpace speculative traders. Although the U.S.-Japan joint intervention has lifted the dollar-yen exchange rate from near a 40-year low, historical experience indicates that foreign exchange interventions often can only alter the rhythm rather than reverse the trend. The fundamental issue lies in the U.S.-Japan interest rate differential the U.S. federal funds rate is at 3.50% to 3.75%, while Japan's policy rate is only 1%, maintaining a spread of 250 to 275 basis points. Global investment strategist at Franklin Templeton Institute noted, "Repeated interventions may buy time, but each round of intervention has the same limitations: Japanese authorities want the yen to strengthen but are unwilling to fully bear the policy costs required to achieve that goal." A senior fellow at the Brookings Institution bluntly stated, "As long as Japanese government bond yields are artificially constrained, the yen remains overvalued and needs to decline." He believes that interventions cannot address the fundamental issues. Moreover, the structural shock from the Middle East conflict on the Japanese economy continues, as Japan relies on the Middle East for 70% of its oil imports. As long as disruptions in the Strait of Hormuz persist, high energy prices will continue to erode Japan's trade balance. Additionally, Japan's fiscal and industrial structural dilemmas have not changed; long-standing issues such as aging, industrial hollowing, and lack of innovation severely undermine the fundamental momentum for sustained yen appreciation. Worse yet, the interventions themselves have "side effects." It has been reported that the U.S. sold euros rather than dollars to buy yen in these operations, which is a stark departure from the traditional practice of financing coordinated interventions with dollar assets, surprising the market. Robin Brooks, a senior fellow at the Peterson Institute for International Economics, pointedly noted that if the U.S. buys yen by selling euros, investors might infer that U.S. officials are trying to avoid Japan financing through selling U.S. Treasury bonds, which is, in fact, a distortion. Brooks believes, "This method of operation weakens the actual effectiveness of U.S. participation in interventions, as it inevitably leads the market to wonder why the U.S. does not directly use dollars to purchase yen." In his view, this arrangement could ultimately undermine rather than bolster market confidence in the yen.