US support for Japan's yen defense could change intervention expectations

Overview

This report focuses on the yen exchange rate and US-Japan coordination on foreign exchange policy. Nomura notes that media widely reported that the US Treasury may have sold EUR/JPY through the Federal Reserve Bank of New York on July 31, joining Japan's efforts to curb yen depreciation. Although the action has not yet been officially confirmed, statements by US officials, previous rate inquiries, and references in the US Treasury's foreign exchange report to yen undervaluation and excessive volatility all indicate growing US support for Japan's yen defense.

Core views

The core view is that if the US did participate in coordinated yen-buying intervention, its symbolic significance could outweigh the actual amount involved and prompt the market to reassess the yen trend. The report believes that past coordinated US-Japan interventions generally occurred near turning points in the USD/JPY trend. Current CFTC non-commercial positioning shows that yen net shorts remain substantial; if intervention is confirmed, short covering would drive yen buying. Meanwhile, US support for Japanese intervention could be accompanied by demands for Japan to accelerate monetary policy normalization, potentially intensifying expectations for an earlier Bank of Japan rate hike.

Analysis framework

The report assesses the credibility and policy implications of coordinated US-Japan intervention and its short-term impact on USD/JPY by combining media reports, statements by US and Japanese officials, the US Treasury's foreign exchange report, historical cases of coordinated US-Japan intervention, estimates of the Bank of Japan's current account balance, CFTC non-commercial yen positioning, and Bank of Japan policy communications.

Methodology notes

• Macro FX strategyPolicy intervention and positioning adjustment framework

  Psychological impact of coordinated intervention

  The report believes that the market impact of coordinated US-Japan intervention depends not only on the amount involved, but also on the policy coordination signal it conveys and the pressure it places on speculative yen short positions.

• Monetary policy analysisAssessment of policy normalization expectations

  Yen weakness and expectations for Bank of Japan rate hikes

  US concerns about yen weakness could translate into pressure on Japan to accelerate monetary policy normalization, thereby increasing market pricing for an earlier Bank of Japan rate hike.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• JPY

  Core beneficiary asset

  Strengths

  US support, strong Japanese authorities' intervention capacity, and substantial short positioning could all support a yen rebound.

  Weaknesses

  A trend reversal still depends on fundamental changes, including oil prices, US monetary policy, and the Bank of Japan's policy stance.

  Comparison

  Compared with unilateral Japanese intervention, coordinated US-Japan intervention would have a stronger psychological impact.

  Risks

  If coordinated intervention is not confirmed or the Bank of Japan does not shift to a more hawkish stance, the yen's appreciation momentum could weaken.

• USD/JPY

  Primary trade expression

  Strengths

  If intervention is confirmed, short covering and changes in policy expectations could push USD/JPY lower.

  Weaknesses

  If US interest rates or external factors continue to support the dollar, the decline in USD/JPY could be limited.

  Comparison

  The report regards 155 as an important level that USD/JPY failed to break during the previous Golden Week intervention period.

  Risks

  If intervention lacks fundamental support, it may be difficult to establish a sustained trend.

• EUR/JPY

  Suspected intervention instrument

  Strengths

  The media reported that the US may sell EUR/JPY, indicating that it could support the yen through a non-USD channel and avoid policy constraints associated with directly selling its own currency.

  Weaknesses

  This operation has still not been officially confirmed.

  Comparison

  Compared with selling USD to buy JPY, selling EUR to buy JPY may better avoid US policy concerns regarding intervention through sales of its own currency.

  Risks

  If the reports are inaccurate, market expectations for the strength of US-Japan coordination could retreat.

Key data

• Suspected size of Japan's July 30 interventionApproximately ¥6-7 trillionEstimated by Nomura based on the Bank of Japan's current account balance.
• Potential cumulative intervention sizeApproximately ¥10 trillionThe report says there may have been additional intervention on July 31, with the cumulative amount potentially reaching this level.
• Historical size of US coordinated interventions$1.13 billion in 1995, $830 million in 1998, and $1.00 billion in 2011The report believes that the US historically participated with relatively small amounts, but had a significant psychological impact.
• CFTC non-commercial yen net shorts$12.5 billionAs of July 28, the largest short position since early July 2024.
• Short-term USD/JPY level to watch155If coordinated intervention is confirmed, the report believes USD/JPY could fall below or at least approach 155.

Impact & implications

The main implication for asset prices is an increased short-term risk of yen appreciation, greater downward pressure on USD/JPY, and potential intervention-related selling pressure on EUR/JPY. The policy implication is that the US may do more than simply tolerate Japan's yen purchases; it may also encourage Japan to become more accepting of further Bank of Japan rate hikes. If the yen weakens again, the market may price in a faster pace of Bank of Japan rate hikes, increasing the probability of a rate hike as early as the September meeting.

Risks

• US participation in coordinated intervention has not yet been officially confirmed.
• Even if coordinated intervention occurred, whether it can establish a yen appreciation trend still depends on fundamental changes.
• US monetary policy, oil prices, and global risk appetite could weaken the yen rebound.
• If the Bank of Japan does not accelerate monetary policy normalization, market support for the yen could weaken.
• Intervention and policy pressure could affect the stability of Japanese and US bond markets.

What to watch

• Formal comments from Japan's Ministry of Finance on the July 30 and July 31 interventions.
• Follow-up comments from the US Treasury, the Federal Reserve Bank of New York, and relevant officials regarding foreign exchange intervention.
• Bank of Japan policy communication and changes in rate hike expectations ahead of the September meeting.
• Whether CFTC yen short positions continue to be covered.
• Whether USD/JPY can fall below or approach 155.
• Whether renewed yen weakness triggers another signal of US-Japan policy coordination.