US and Japan Join Forces to Support Yen and Stabilize US Treasury Market

The recent intervention in the Yen market by Japan and America was not just about supporting Japan's currency, but also about protecting the stability of the US Treasury market.

Banks Goldman Sachs and Bank of America (BofA) suggest that Washington's involvement was motivated by a desire to prevent Japan's defense of the Yen from spilling over into the US Treasury market.

According to BofA, the concern for Washington was how Japan raises the Dollars needed to buy Yen. The bank noted that Japan has 'significant liquidity sources beyond outright UST sales', but also mentioned the Fed's FIMA repo facility as a potential funding source.

BofA estimates that Japan's operation was likely around $85bn in 2 days, the largest 2-day operation since 2011. The bank does not think that Japan dumping Treasuries would automatically destabilise the market, citing the fact that foreign officials now hold just 12% of Treasuries outstanding, down from 31% in 2016.