Japan Considers Unconventional Intervention as Yen Hits Historic Lows

The Japanese government is considering an unconventional approach to defend its currency against dollar weakness. As the yen slides to 159 per dollar, its weakest level in decades, Tokyo weighs using the Federal Reserve's FIMA Repo facility as a new tool for intervention.

In late July, Japan and the US conducted their first joint currency intervention in over 30 years. The US Treasury sold euros to buy yen, deploying $5 billion to $10 billion, while Japan put in more than $50 billion. However, despite initial gains, the exchange rate soon fell back.

The root cause of yen weakness is the interest rate differential between the US and Japan. The US benchmark rate stands at 3.50-3.75% annually, while Japan's policy rate is just 1%. This has led to a persistent sell-off in the Japanese currency due to the yen carry trade.

The conventional approach of selling US Treasuries to raise dollars could backfire by pushing up US interest rates and strengthening the dollar. Using FIMA Repo would allow Japan to borrow dollars from the Fed without disposing of its Treasury holdings, avoiding a drawdown of foreign reserves and sidestepping shocks to the Treasury market.