Rare US-Japan Cooperation Ends Era of Yen Arbitrage

TL;DR
· After confirming a joint purchase of yen, the USD/JPY fell from nearly 164 last week to around 155, forcing yen shorts to reassess intervention risks.
· Photos from Reuters show that a notepad belonging to Secretary of the Treasury Scott Bessenet noted plans to buy 5 to 10 billion USD worth of yen; this scale has not been officially confirmed, but the US has stated it does not rule out further participation.
· Coordinated intervention can trigger the unwinding of arbitrage positions but cannot eliminate the US-Japan interest rate differential; whether the yen can continue to appreciate depends on the Bank of Japan's interest rate hikes and US yield trends.
· Japan may use dollar assets to support intervention, but the FIMA repo tool can reduce the need to sell US Treasuries directly, meaning pressure on US Treasuries is not a mechanical result.

The signal for US-Japan joint intervention in the yen rapidly developed around August 3.

Japanese Finance Minister Shunichi Suzuki confirmed that the Japanese Ministry of Finance had coordinated with the US Treasury to buy yen. US President Trump and Treasury Secretary Scott Bessenet also confirmed US participation and stated that further joint action could not be ruled out. Following the official statements, the USD/JPY quickly fell from a 40-year high of nearly 164 to around 155.20; the exchange rate recorded by AP on the morning of August 3 was approximately 156.34.

Meeting of US and Japanese Finance Ministers

The most significant change in this round of market activity is not just that Japan is selling dollars and buying yen again, but that the US has moved from verbal support to actual coordination.

For traders who have long bet on yen depreciation, the original logic has not completely failed: US interest rates remain significantly higher than Japan's, and holding dollar assets can still earn interest rate differentials. However, the risk structure of this trade has changed. In the past, the market primarily judged the scale and duration of Japan's unilateral interventions; now, it must also consider US participation, the possibility of repeated actions by both sides, and the potential for officials to establish a policy defense line at specific price points.

US-Japan joint intervention takes effect, yen rebounds rapidly

USD/JPY falls quickly from 164

The speed of the yen's rebound is itself the most direct evidence of the impact of coordinated intervention on market expectations.

At the end of July, the USD/JPY approached 164, with the yen falling to its lowest level in about 40 years. A weak yen can increase overseas profits for Japanese export companies when calculated in yen, but it also raises the costs of imported energy, food, and raw materials, further increasing the cost of living for households and operational pressures for businesses. As the exchange rate continued to fall below previously sensitive levels of 150 and 160, the Japanese government’s political tolerance for depreciation clearly decreased.

Japan had previously entered the market alone to buy yen, but the exchange rate often only rebounded in the short term. The familiar script for the market is: the Ministry of Finance intervenes, shorts temporarily cover, and then the US-Japan interest rate differential attracts funds back to dollar assets.

This time, the market is not facing the same script.

The Japanese Ministry of Finance explicitly used the term “coordinated intervention,” and Bessenet stated that the US Treasury would continue to communicate with Japan and “would not hesitate” to participate in joint actions again. Officials do not necessarily need to continuously invest large sums of money; as long as traders believe that the USD/JPY near 164 may again face bilateral intervention, the tail risk of continuing to short the yen will significantly increase.

Signal of 5 to 10 billion USD exposure, US moves from verbal support to actual participation

Photos taken by Reuters on July 31 show that Bessenet's notepad at the Camp David cabinet meeting noted: “To Do: Buy Japanese Yen (JPY) $5-10 bil.”, indicating a purchase of 5 to 10 billion USD worth of yen.

Reuters published a photo showing Bessenet's notepad at the cabinet meeting on Friday. Under the “To Do” heading, he wrote, “Buy 5 to 10 billion USD worth of yen (JPY).”

This notepad does not prove how much yen the US ultimately bought. When the photo was exposed, the US Treasury had not confirmed the specific amount. The key information it provides is that the US Treasury at least seriously considered a yen purchase operation of practical scale, rather than merely supporting Japan through diplomatic statements.

Subsequently, the US and Japan officially confirmed the joint intervention, further enhancing the market significance of this photo. Bessenet also publicly stated that the US would be willing to repeat the action if necessary. The 5 to 10 billion USD may not be enough to change the supply-demand relationship in the global foreign exchange market in the long term, but it is sufficient to make highly leveraged yen shorts recalculate their stop-loss points and position sizes.

The real way intervention works is not just through direct official funding pushing the exchange rate.

When the USD/JPY falls rapidly, investors who borrowed yen to buy dollar assets will incur exchange losses. Some highly leveraged accounts need to supplement their margin, and some trend trades and option positions will trigger stop-losses. The unwinding process requires investors to sell dollars and buy back yen, thereby amplifying the short-term gains of the yen.

Thus, the rapid drop from around 164 to the 155 to 156 range includes not only official trades but also the concentrated deleveraging of arbitrage and trend positions.

Yen shorts begin to retreat, risks transmitted to global assets

Yen arbitrage has not ended, but the trading odds have changed

There has been talk in the market of the “end of yen arbitrage trading,” but this judgment is still premature.

On July 29, the Federal Reserve maintained the federal funds target range at 3.50% to 3.75%, while the Bank of Japan kept its short-term policy rate at 1% on July 31. Even without considering hedging costs, US short-term rates remain significantly higher than Japan's, and the basic yield from borrowing yen and allocating dollar assets has not disappeared.

Coordinated intervention changes the risk-reward ratio of this trade.

In the past, investors might have thought that Japan's unilateral intervention could only bring about temporary fluctuations, so they were willing to re-establish shorts after the yen rebounded. Now, they also need to pay a higher risk premium for the possibility of US re-entry, increased intervention frequency by officials, and the potential for the Bank of Japan to raise interest rates ahead of schedule.

As a result, yen shorts may reduce leverage, shrink positions, or buy more options for protection, but this does not mean that funds have completely abandoned interest rate differential trading. As long as the US-Japan interest rate differential remains high, every rebound of the yen may still encounter new selling pressure.

A more accurate judgment is that coordinated intervention has compressed the leverage space for yen shorts but has not eliminated the macro basis for shorting the yen.

US Treasuries face spillover risks, but the transmission method has changed

The global impact of yen intervention is not limited to the foreign exchange market; it also involves how Japan raises the dollar funds needed to buy yen.

US Treasury TIC data shows that as of the end of May 2026, Japan held approximately 1.143 trillion USD in US Treasuries, making it the largest foreign holder. TIC data is influenced by factors such as custodial account ownership and cannot accurately reflect ultimate ownership, but Japan's large US Treasury position remains an important indicator for observing intervention spillover risks.

The traditional operational chain is that the Japanese Ministry of Finance uses foreign exchange reserves to sell dollars and buy yen in the market. If existing dollar cash is insufficient, theoretically, it can sell dollar assets, including US Treasuries. Large-scale, sustained sales of US Treasuries may increase market supply and put upward pressure on US long-term yields.

However, this transmission chain does not necessarily have to occur.

Bessenet revealed that the FIMA repo tool, which the Federal Reserve offers to foreign central banks and international monetary authorities, played a role in this action. This tool allows foreign official institutions to temporarily use US Treasuries held at the New York Fed as collateral to obtain dollar loans, thereby gaining the dollar liquidity needed for intervention without directly selling US Treasuries. Bessenet also suggested that the scale of this tool should be expanded in the future.

This means that one of the goals of US-Japan coordination may be to allow Japan to support the yen while avoiding concentrated sales of US Treasuries that would raise US financing costs.

Therefore, the risks associated with US Treasuries need to be understood in two layers: in the short term, the FIMA tool can buffer forced selling pressure; if the scale of intervention continues to expand and the duration extends, Japan may still adjust its dollar asset allocation, and the US Treasury market would then face more significant supply impacts.

Intervention changes short-term odds, interest rate differentials determine long-term trends

The Ministry of Finance can buy time, but the central bank determines the trend

Coordinated intervention can change short-term positions, but it is difficult to independently determine the medium to long-term direction of the yen.

The Bank of Japan has gradually exited ultra-loose monetary policy, raising the policy rate to 1%, but its tightening speed is still constrained by domestic economic conditions, government financing costs, and the stability of the Japanese government bond market. On July 31, the Bank of Japan maintained its interest rate unchanged with a vote of 8 to 1, with only one member advocating an immediate increase to 1.25%.

This creates a clear tug-of-war for Japanese policy.

The Ministry of Finance wants to prevent the yen from depreciating too quickly, reducing imported inflation and political pressure; the Bank of Japan cannot raise interest rates rapidly for the sake of the exchange rate, as this may push up Japanese government bond yields, increasing the financing burden on the government, businesses, and households.

Intervention in this process is more like buying time: by creating two-way fluctuations and forcing shorts to reduce leverage, it creates a window for the Bank of Japan to gradually normalize its policy.

However, the trend of the exchange rate ultimately depends on the fundamentals. If the Bank of Japan continues to raise interest rates and US yields decline, the US-Japan interest rate differential will narrow, making it easier for the yen to sustain its rebound; if the interest rate differential remains high for a long time, the gains after intervention may gradually be given back.

Still far from a “New Plaza Accord”

The market has begun to see grand narratives such as the “New Plaza Accord” and the “end of the yen arbitrage era,” but the current facts are still insufficient to support these judgments.

The Plaza Accord of 1985 involved multiple major economies jointly promoting an orderly depreciation of the dollar, involving broader policy coordination and global exchange rate restructuring. The scope of this action is narrower, with the direct goal of curbing excessive and disorderly depreciation of the yen and preventing fluctuations in the exchange rate and bond markets from spreading to the global financial system.

What can be confirmed at this stage is that the US and Japan have jointly bought yen, and Bessenet's notepad shows that the US has considered an operation of 5 to 10 billion USD in scale, with both sides clearly reserving the possibility of further intervention. The USD/JPY subsequently fell rapidly from nearly 164 to the 155 to 156 range.

This is enough to change short-term trading but not enough to prove that the yen has entered a long-term appreciation cycle.

What truly needs to be observed next are three things: whether the US will participate in actual transactions again, whether the Bank of Japan will accelerate its interest rate hikes, and whether the FIMA tool can allow Japan to continue obtaining dollar liquidity without significantly impacting the US Treasury market.

Until these questions are answered, yen shorts will not completely disappear. However, they will find it much harder to easily bet that Japan's intervention is just a temporary wind.