US and Japan Team Up to Bolster Yen Amid Carry Trade Unwind

The US and Japan have made a rare joint intervention to support the yen, which has fallen to 40-year lows of 164 per dollar. This is the first coordinated move between the two countries since 1998.

The New York Fed sold euros on behalf of the US Treasury using the Exchange Stabilization Fund (ESF), highlighting Washington's deeper coordination with the Bank of Japan (BoJ).

The backdrop for this intervention is a potential liquidity squeeze from a yen carry trade unwind as Japan shifts away from ultra-low rates. Japanese two-year bond yields have risen above 1.57%, reinforcing the repricing already under way and raising the prospect of capital repatriation by Japanese institutions.

The concern is that disorderly deleveraging could drain liquidity, even as official actions to stabilise the currency may inject dollars via facilities such as FIMA, a repo facility through which the BoJ can obtain dollars against US Treasuries as collateral rather than selling bonds.