Rare Move! Japan and the U.S. Jointly Intervene, Bessent Publicly Backs the Yen, Triggering a Sharp Rally!

Market sources confirmed that the Japanese government and the Bank of Japan conducted a foreign exchange intervention during Thursday's New York trading session by buying yen and selling U.S. dollars. This was Japan's first intervention in the FX market in three months. However, unlike any previous intervention, this time U.S. Treasury Secretary Scott Bessent publicly expressed support in advance, the New York Fed simultaneously conducted a "rate check," and South Korea also took the rare step of coordinating its actions. In addition, Bank of Japan Governor Kazuo Ueda is scheduled to hold a press conference at 2:30 p.m. today, and his comments on the future path of interest rate hikes could become the turning point for the yen.

What happened?

During Thursday's New York trading session, at around 9:30 p.m. Beijing time, USD/JPY fell sharply from around 162.80, successively breaking below the 162, 161, 160, 159, and 158 levels. At approximately 10:23 p.m. Beijing time, the pair touched an intraday low of 157.97.

Just one week earlier, the yen had approached the 164 level, marking its weakest level since the end of 1986. This intervention came after the yen had fallen to a 40-year low.

This was not an ordinary market move. Strategists at multiple institutions believe the price action closely matched the pattern seen during previous Japanese currency interventions. A senior strategist at Mizuho Bank's London branch noted that the previous intervention also took place on the day after the FOMC meeting concluded.

A senior FX and rates strategist at SMBC Nikko Securities said that intervening before the Bank of Japan announced its policy decision "may have been intended to catch the market off guard and maximize the effectiveness of the intervention. This contrasts with the more transparent and easily identifiable intervention in April."

The source of the intervention funds is also noteworthy. According to Japan's Ministry of Finance foreign exchange reserve data, the Japanese government likely raised funds by selling overseas securities, including U.S. Treasuries. Between April 28 and May 27, Japan spent a record ¥11.73 trillion (approximately US$73.2 billion) intervening in the FX market. This latest intervention may have been of a similarly significant scale.

The U.S. Publicly Endorses the Move: The Yen Is Deeply Undervalued

Speaking to Fox Business on the day of the intervention, U.S. Treasury Secretary Scott Bessent stated clearly that the yen "appears to be deeply undervalued" and that excessive volatility is unhealthy. He said: "It seems to me that the yen is deeply undervalued. The yen is very cheap. Japan's economy is performing well." Bessent also said he was not concerned about a stronger yen against the U.S. dollar.

The market viewed these comments as a positive signal from the United States in support of Japan's efforts to stabilize the yen. Even more significantly, Nikkei reported that U.S. monetary authorities also conducted a "rate check," a step typically seen before an intervention. Acting under instructions from the U.S. Treasury Department, the Federal Reserve Bank of New York asked multiple banks to provide their foreign exchange trading quotes. This suggests that Japan and the United States jointly took action to curb the yen's depreciation.

Market participants interpreted Federal Reserve Chair Waller's remarks after keeping interest rates unchanged as dovish, potentially creating an opportunity for the Bank of Japan to support the yen. In addition, the U.S. Treasury Department's semiannual foreign exchange report released earlier this month had already sent a signal. Although the U.S.-Japan interest rate differential has been narrowing, the yen's weakness has persisted, and excessive exchange rate volatility is "unhelpful." The report also urged the Bank of Japan to continue raising interest rates and warned that inflation is eroding Japanese households' purchasing power.

Washington's position is now clear: support Japan's intervention to curb excessive volatility while urging the Bank of Japan to address the root cause through further rate hikes.

Another noteworthy development is that South Korea also joined the effort. South Korea took the rare step on Thursday of selling U.S. dollars, pushing the Korean won to a nine-month high. The won had also been under significant depreciation pressure, while persistent foreign capital outflows had weighed heavily on the South Korean stock market.

Japan and South Korea taking coordinated currency action immediately after the Federal Reserve's policy decision—and doing so at almost the same time—suggests a certain degree of regional coordination. The underlying logic is consistent: the window created by the Fed's dovish stance and expectations of a weaker U.S. dollar may be short-lived and must be seized.

Why Act Before the Central Bank Meeting?

Toru Suehiro, Chief Economist at Daiwa Securities, said: "The intervention came earlier than the market expected. I had originally thought Japan would be more likely to intervene after the Bank of Japan meeting on July 30-31." The decision to act early was based on three considerations:

First: The Fed's dovish stance created a favorable window. Markets interpreted Waller's comments following the July 29 FOMC meeting as dovish. The resulting weakness in the U.S. dollar created a more favorable environment for Japan's intervention.

Second: To pave the way for Ueda's press conference. JPMorgan strategist Junya Tanase pointed out that authorities may have deliberately chosen to intervene before the Bank of Japan's policy announcement because they expected Governor Kazuo Ueda's potentially dovish comments to trigger another wave of yen selling. The intervention helped eliminate part of the market's short positions in advance, providing a buffer against any moderate remarks Ueda might make.

Third: To maximize the surprise effect. Acting after Japanese markets had already closed is entirely consistent with the Ministry of Finance's usual approach. Unlike the more transparent and easily identifiable intervention in April, this operation was deliberately designed to catch the market by surprise.

Governor Kazuo Ueda's Press Conference This Afternoon

The Bank of Japan will announce its interest rate decision later today. Markets widely expect the policy rate to remain unchanged at 1%. Investors are focused on one key question: whether Governor Kazuo Ueda will signal that the next rate hike could come earlier than many economists currently expect. If he emphasizes upside inflation risks and hints at an earlier rate increase, it would reinforce Thursday's intervention and further strengthen the yen. Market pricing currently implies expectations for at least one additional 25-basis-point rate hike before year-end. If Ueda anchors market expectations toward October instead of December, the yen could continue to strengthen.

Historically, Japan's foreign exchange interventions have had only temporary effects. Despite spending around US$100 billion on interventions in 2024, Japan failed to reverse the broader trend of yen depreciation. The country's first intervention since 1998, conducted in 2022, also had only a short-lived impact. Even the record ¥11.73 trillion intervention between April and May merely slowed the decline temporarily.

This intervention differs in three key ways: public backing from the United States, simultaneous exchange rate checks, and coordinated action by South Korea. Even so, intervention alone cannot solve the underlying problem—the more than 250-basis-point interest rate differential between Japan and the United States. As long as carry trades remain profitable, the yen will continue to face structural selling pressure.