From "tacit approval" to "personal involvement," why is the U.S. intervening in the yen issue at this time?

The New York Federal Reserve inquired about the exchange rate of the US dollar against the Japanese yen last Friday, resulting in a sharp decline of approximately 1.6% in the USD/JPY exchange rate. The possibility of a joint intervention by the US and Japan to curb the excessive strength of the dollar or the rapid depreciation of the yen has increased.

According to the Wind Trading Desk, the Bank of America Securities team led by Alex Cohen stated in a research report released on January 25 that this move represents a key shift in the US foreign exchange policy stance, with the US possibly intending to suppress the appreciation of the dollar to enhance trade competitiveness, maintain the stability of US Treasury bonds, and increase diplomatic leverage against Japan.

With the Japanese elections approaching, a joint effort by the US and Japan to stabilize the exchange rate may be aimed at buying time for the government of Prime Minister Kishi Sanae during the election window, while also avoiding shocks to the Japanese stock market. This move aims to keep the exchange rate within politically acceptable limits, rather than immediately pushing the yen to extremely high levels.

Key Shift in US Foreign Exchange Policy Stance

Bank of America Securities pointed out that last Friday's event broke the market's inherent perception of the US's "non-intervention" stance. Previously, the market generally expected that after US Treasury Secretary Janet Yellen commented on recent exchange rate trends, the US would merely acquiesce to the Japanese Ministry of Finance intervening when necessary.

However, the direct intervention by the New York Federal Reserve trading desk changed this expectation. Over the past fifteen years, despite significant fluctuations in the yen, the US has primarily participated through joint statements or tacit approval from the Group of Seven (G7), with few reports of direct actions.

The Bank of America analyst team led by Alex Cohen emphasized in the report that if this "exchange rate check" is confirmed, it marks a more aggressive stance from the US Treasury under this administration than in the past few decades. This is consistent with last autumn's direct intervention by the US to support the Argentine peso, indicating a greater willingness to incorporate foreign exchange policy into its broader diplomatic and economic policy toolbox.

Why Did the US Intervene? Three Potential Motivations

Understanding the motivations behind the US Treasury's intervention at this time is crucial. The Bank of America report outlines three possible strategic objectives for the US taking this action:

1. Preventing Dollar Appreciation. The US may aim to enhance its trade competitiveness by suppressing the dollar's exchange rate. If this is the dominant motivation, it suggests broader downside risks for the dollar in the future.

2. Maintaining Stability in the US Treasury Market. If Japan acts alone, it may need to sell US Treasury bonds as reserve funds. By supporting the yen, the US can stabilize the Japanese Government Bond (JGB) market, thereby reducing spillover risks to the US Treasury market.

3. Increasing Diplomatic Leverage Against Japan. As a diplomatic tool, this move aims to support its key ally Japan, especially in the context of Japan's commitment to invest $550 billion in the US and potentially increase defense spending. The US is using coordinated exchange rate policy to secure Japan's cooperation on broader policy objectives.

Japan's Demand: Market Stability Before the Elections

For the Japanese government, the core demand at present is the stability of the exchange rate and the stock market. The Bank of America report indicates that the Kishi Sanae government may wish to maintain the USD/JPY exchange rate in the range of 145–155 in the short term, and to gradually fall back to the range of 135–145 in the medium term, which is seen as more aligned with fundamentals and interest rate differentials However, as the February 8 election approaches, the Japanese government does not wish for the yen to appreciate excessively. Sharp fluctuations in the exchange rate could trigger a significant correction in the Japanese stock market, which would be detrimental to the election. At the same time, a too-strong yen would also make the central bank cautious when re-anchoring inflation expectations.

Therefore, the "exchange rate check" jointly conducted by the U.S. and Japan may be more about buying time for the government of Sanna Marin during the election window, keeping the exchange rate within politically acceptable limits, rather than an intention to immediately push the yen to extremely high levels.

Market Outlook: Intervention Risks and Exchange Rate Trends

Looking ahead, Bank of America Securities expects that this action by the Federal Reserve and the U.S. Treasury will suppress the USD/JPY exchange rate below 160 in the short term, especially before the February 8 Japanese election. If this currency pair tests recent highs again, the risk of coordinated intervention, including from the U.S., will significantly increase.

However, analysts also remind that although two rate hikes by the Bank of Japan and two rate cuts by the Federal Reserve are expected to support the yen in 2026, the upward trend of USD/JPY may resume later against the backdrop of strong U.S. economic performance and structural capital outflows from Japan. In this case, as long as U.S. inflation remains controlled, the possibility of coordinated intervention will continue to exist in the future.

For investors, this means that a simple unilateral short strategy on the yen is no longer safe, and one must remain vigilant against dual policy resistance from Washington and Tokyo