Event Alert | U.S. and Japan Join Forces to Defend the Market; 164 Becomes New Policy Red Line

💡Key Takeaways

The coordinated U.S.-Japan intervention has effectively curbed the disorderly upward move in USD/JPY in the short term, but historical experience shows thatofficial intervention alone is unlikely to reverse the medium- to long-term trend in exchange rates; the true anchor remains the U.S.-Japan interest rate differential and the policy paths of the Federal Reserve and the Bank of Japan.

From a risk-reward perspective, the U.S. and Japan have signaled they are unwilling to tolerate disorderly expansion of USD/JPY above the 164 level,making long positions in USD/JPY significantly less attractive,but barring major fundamental shifts—such as a dovish pivot by the Fed or widespread unwinding of carry trades—the likelihood of the exchange rate directly falling toward 150 or even lower remains limited. In the medium term, closely monitor changes in CFTC net short positions in JPY to assess whether this round of intervention has materially altered market structure.

I. Event and Action Timeline

🔍 On the evening of August 2, U.S. Treasury Secretary Bessent stated that the coordinated foreign exchange intervention by the U.S. and Japan had effectively contained disorderly volatility in the yen exchange rate, adding that the U.S. Treasury would not hesitate to participate in further joint interventions. On August 3, Japanese Finance Minister Satsuki Katayama confirmed that the U.S. and Japan had jointly conducted FX market intervention and would continue coordinated action whenever necessary.

Step one: On the night of July 30, Japanese authorities conducted yen-buying, dollar-selling intervention, causing USD/JPY to plunge sharplyfrom around 163.5–164 to approximately 158.5–159 in a short period，representing a maximum appreciation of about 3.4%–3.44%，with market characteristics highly consistent with official intervention. Step two: From the night of July 31 into the early hours of August 1, U.S. involvement escalated to actual participation. Market rumors indicated that the New York Fed, acting on behalf of the U.S. Treasury, sold euros and bought yen, aiming to assist Japan in stabilizing the yen,but not to actively weaken the dollar itself.

II. Three U.S. Motivations

The reason for U.S. intervention is that an excessively weak yen could spill over and affect U.S. financial stability, Treasury market stability, and asset price stability among its allies.If the U.S. were to directly sell dollars in the USD/JPY pair, the market would interpret this as an official attempt by the U.S. to reverse dollar strength; however, by operating through the EUR/JPY cross pair,it is effectively signaling the market its intent to prevent excessive yen depreciation, without necessarily implying a short position on the U.S. Dollar Index.Specifically, the U.S. has three main motivations:

1. To avoid additional shocks to the U.S. Treasury market from large-scale Japanese selling of U.S. dollar-denominated assets. Japan’s yen-buying interventions typically require drawing on foreign exchange reserves, which are heavily invested in dollar assets. If the yen continues to depreciate uncontrollably and Japan is forced into frequent, large-scale interventions, it could exacerbate supply pressures in the U.S. Treasury market. U.S. support for Japan—even choosing to sell euros to buy yen—essentially helps reduce Japan’s need to directly sell U.S. dollar assets.。

2. Concerns about spillovers from Japanese government bond (JGB) market volatility into the U.S. Treasury market. U.S. officials have explicitly expressed worries about JGB market turbulence transmitting to U.S. Treasuries;if USD/JPY continues to rise rapidly, markets may further bet that the Bank of Japan will be forced to hike rates more quickly, thereby increasing JGB volatility and subsequently spilling over into global interest rate markets.。

3. To safeguard asset market stability among U.S. allies such as Japan and South Korea. Recently, not only Japan but also South Korea has been noted to have conducted supportive interventions for its domestic currency, indicating heightened coordination among the U.S., Japan, and South Korea on exchange rate matters;continued disorderly depreciation of the yen and won could trigger volatility in regional asset prices and financing conditions for the technology supply chain, which would not be in the U.S. interest.。

A historical reference point is June 17, 1998, when the U.S. sold dollars and bought yen in a coordinated intervention with Japan, amounting to approximately USD 833 million, impacting the USD/JPY exchange rate.Following the joint intervention, the USD/JPY rate quickly fell from around 142 to below 136, and briefly declined further to around 133, but by July 13it had rebounded above the pre-intervention level, and even reached a new high in August thereafter.The real driver behind the subsequent significant yen strength was the large-scale unwinding of carry trades triggered later by Russia’s default and the LTCM crisis.Without more substantial fundamental shifts,such as a markedly dovish pivot by the Federal Reserve, accelerated normalization by the Bank of Japan, or a broad decline in global risk appetite triggering a full reversal of yen carry trades,this round could follow a path of an initial sharp drop, followed by consolidation, and then retesting the upper boundary.。

Third, interest rate differentials remain the key variable over the medium term.

From January to July 2026, the market-implied policy rate differential between the U.S. and Japan for end-2026 showed a strong positive correlation with USD/JPY movements:As the rate differential widened from approximately 170 bps to nearly 280 bps, USD/JPY rose from around 153 to close to 164; in mid-to-late Julywhen the rate differential pulled back to around 260 bps, USD/JPY also retreated to approximately 161。Short-term intervention can temporarily decouple exchange rates from rate differentials, but over longer horizons, rate differentials remain the key directional anchor.However,The recent upward move in USD/JPY can no longer be fully explained by long-end rate differentials alone，It is also driven by additional factors, including elevated yen short positions, hedging-related yen selling stemming from high Japanese equity valuations, and concerns that Japanese monetary policy is falling behind the curve。On July 31, the Bank of Japan kept its policy rate unchanged at 1.0%, but markets have already priced in an additional ~30 bps of rate hikes for the remainder of the year,implying the policy rate couldrise from 1.00% to around 1.30%。

Historically, foreign exchange interventions have failed to reverse the yen's depreciation trend,Following interventions in October 2022 and April–May 2024/2026, USD/JPYexperienced notable short-term pullbacks each time.itWithout concurrent dollar weakness or synchronized tightening of Japanese monetary policy, the exchange rate often eventually reverts close to its pre-intervention highs.。 Optimistic voices argue:160 is roughly the long-term peak, and a decline to 150—or even 145—is possible within the year.Cautious observers, however, note that although intervention may cap upside beyond 164,given the Fed’s hawkish stance, the Bank of Japan’s gradual rate hikes, and ongoing fiscal constraints,USD/JPY could still hover around 160 in Q3 2026 and 164 in Q4 2026, respectively.。

IV. Impact on Assets and Trading

Whether considering Japanese authorities’ prior sensitivity around the 160 level or their renewed intervention in the 162–164 range this time—now with U.S. involvement—it is clear thatNeither Japan nor the U.S. is willing to tolerate disorderly upside moves in USD/JPY beyond 164.The risk-reward profile for long USD/JPY positions has deteriorated; the counterparty is no longer just Japan’s Ministry of Finance but a policy-imposed ceiling enforced jointly by the U.S. and Japan.。Historically, after unilateral Japanese intervention, yen appreciation of around 4% has approached the empirical upper limit.Without further fundamental shifts, the probability of a direct move down to 150—or even lower—is relatively low.Therefore,A more reasonable current assessment is that the near-term upside is capped, while the medium-term direction hinges on interest rate hikes and the Fed’s policy path.。

⚠️ Regarding bonds and risk assets, watch whether carry trades evolve into systemic risk:If yen short positions, which previously peaked at 120,000–150,000 contracts, begin to be consistently unwound, and if the Bank of Japan follows through with faster rate hikes, thenthe fragility of the carry trade chain will rise significantly.. The significance for global equity assets lies inJPY appreciation → unwind of carry trades → sell-off in Japanese equities / Korean equities / high-volatility tech assets → decline in global risk appetiteis the transmission chain.

⚠️ Going forward, watch whether JPY short positions have truly been cleared:If CFTC short positions after Augustfall below 100,000 contracts,it indicates thatintervention has significantly altered market structure;if they remainabove 120,000 contracts,it means short sellers have only temporarily reduced their positions,The likelihood of a comeback is relatively high。

Sources: Reuters, Fortune, Nikkei, New York Fed official quarterly report, JPM

[Investment Advisory Information]

Yu Shilin, Licensed Representative, CE Number: ATQ882

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