US and Japan Coordinate Yen Intervention, Raising Carry Trade Unwind Fears
On Friday, a rare joint intervention to buy yen was executed by the US Treasury and the Bank of Japan, which involved selling euros to finance these purchases. Treasury Secretary Scott Bessent stated that this measure was intended to address 'disorderly yen movements' following the currency's drop to a 40-year low of 163.73 per dollar. The yen rebounded to 157.57 on Friday and was trading at 157.70 on Monday. Finance Minister Satsuki Katayama expressed a willingness to conduct more interventions, potentially utilizing the Federal Reserve's FIMA repo facility for dollars. Analysts are concerned that this could lead to a yen carry trade unwind, as hedge funds hold 124,575 contracts betting against the yen. Japan's structural challenges restrict the Bank of Japan's capacity to raise rates, and the IMF framework permits only limited interventions, which Japan might leverage.
Key facts
- The US Treasury and Bank of Japan conducted a coordinated yen-buying intervention on Friday, with the US selling euros to fund the purchases.
- The yen had hit 163.73 per dollar on Thursday, its weakest in about four decades, and strengthened to 157.57 on Friday.
- Treasury Secretary Scott Bessent confirmed the action, saying it 'countered disorderly yen movements.'
- Japan's Finance Ministry said it will not hesitate to conduct further coordinated interventions and will use the Fed's FIMA repo facility.
- Global hedge funds held 124,575 contracts (worth about $9.5 billion) betting on yen weakness as of July 28, near record highs.
- The Nikkei reported the yen has surpassed its 200-day moving average, with the next battleground at 155 yen per dollar.
- Around 14% of Japanese companies are 'zombie companies' that pay more in debt interest than they make in profit, limiting the BOJ's ability to hike rates.
- The IMF framework limits intervention to at most three instances over six months, with each episode lasting no more than three business days.
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