Treasury's Yen Intervention Capacity Falters Amid Reserve Constraints

The US Treasury's recent intervention in the foreign exchange market has raised questions about its ability to continue propping up Japan's currency. According to JPMorgan, the Treasury's foreign exchange reserves are finite and may soon be depleted.

In a rare move, the Treasury purchased yen on August 1 through the Federal Reserve Bank of New York, with Goldman Sachs and Morgan Stanley facilitating the transaction. The intervention was estimated to be worth between $5 billion and $10 billion.

JPMorgan warns that if further intervention becomes necessary, the Treasury may need to turn to 'extraordinary measures' to expand its capacity. This is because currency intervention is not like monetary policy, where the Fed can expand its balance sheet theoretically. The Treasury works with a fixed pool of resources, which means burning through them on yen purchases would leave less ammunition for future operations.

Japan has experienced similar interventions in 2024 and 2026, with the Japanese Ministry of Finance executing an estimated ¥5.5 trillion intervention in 2024, equivalent to approximately $35 to $36 billion.