U.S. and Japan Jointly Intervene in FX Market for the First Time in Nearly 30 Years, Market Watches for New Wave of 'Carry Trade Unwinding'

The governments of the United States and Japan have carried out their first coordinated yen-buying intervention since 1998, nearly 30 years ago. The intervention was prompted by the yen's exchange rate falling to a 40-year low against the U.S. dollar, drawing significant concern from both countries' financial authorities. Japanese Finance Minister Shunichi Suzuki confirmed the action on Monday (3rd) and issued a stern warning, emphasizing that the two countries would not rule out further joint interventions if market volatility persists.

As a result of the intervention, the yen appreciated sharply. In early Monday trading, the dollar-yen rate moved from above 163 before the intervention to around 156.5. However, the strong rebound in the yen put pressure on Japanese exporters, causing the Nikkei 225 index to plunge as much as 2.5% during the session.

Market participants are now holding their breath, watching whether this move will trigger a new wave of 'carry trade unwinding'.

The so-called yen carry trade refers to investors borrowing low-cost yen and investing the proceeds in higher-yielding overseas assets or currencies. This strategy triggered global market turmoil in the summer of 2024, when the Bank of Japan's intervention and an unexpected rate hike, combined with expectations of U.S. rate cuts, caused the yen to surge rapidly. This led to a wave of leveraged position liquidations, resulting in a sell-off in U.S. stocks and a sharp increase in market volatility.

Vishnu Varathan, Head of Asia Pacific Macro Strategy at Mizuho Bank, pointed out that the U.S.-Japan joint action has significantly increased the 'deterrence value' against speculative yen short positions and carry traders. However, unlike in 2024, this intervention has not been accompanied by major shifts in interest rate expectations for either the U.S. or Japan.

Therefore, despite the strong intervention, analysts caution that intervention alone may not be sufficient to sustain a long-term yen rally. A significant interest rate differential between the U.S. and Japan still exists, making carry trades logically attractive. Michael Wan, Senior Analyst at MUFG, stated that while this historic coordinated action helps clear out short-term bearish positions, a sustained strengthening of the yen will ultimately require fundamental changes in interest rate differentials.

Bank of America strategists predict that if the yen can consistently remain below the 155 level, investors will be forced to reassess their long-term bearish strategies on the yen.

The consensus among analysts is that the Bank of Japan may need to raise interest rates again in September or October to narrow the yield gap with the U.S. and truly sustain the yen's upward momentum.

Charu Chanana, Chief Investment Strategist at Saxo Bank, said: 'Coordinated intervention has already changed the risk-reward structure of short-yen trades in the near term.' However, she emphasized that for the yen to achieve a more sustained strengthening, it will ultimately require fundamental support. This could come from further tightening by the Bank of Japan, a decline in U.S. Treasury yields, or improved market confidence in Japan's fiscal outlook.