US-Japan Intervention: A Novel 'Weak-Dollar' Tactic Unveiled

The recent U.S.-Japan intervention in the EUR/JPY cross has sent shockwaves through global financial markets. The intervention, unseen for decades, involved a rare joint currency action between the two nations to counteract the disorderly depreciation of the yen.

What's novel about this intervention is that Japan continued selling U.S. dollars and buying yen in the USD/JPY pair, while the U.S. Treasury exclusively sold euros and bought yen via the EUR/JPY cross-currency pair throughout the intervention. HSBC described this as an 'almost unprecedented unconventional move.'

Japan deployed up to $36.58 billion in intervention funds, triggering a massive wave of short-covering in the market and decisively reversing the yen's short-term downtrend. However, given that the U.S. holds only approximately €26 billion in readily available intervention reserves, this euro-selling intervention model lacks long-term sustainability.

The true underlying strategy behind the intervention is to benefit from a modestly weaker dollar without tolerating market expectations of active depreciation. This move to abandon the U.S. dollar in favor of the euro for intervention conceals three layers of self-serving strategic calculations: stabilizing the U.S. Treasury market, quietly reaping the benefits of a weaker dollar, and using the euro as a shield to achieve covert depreciation while maintaining an outward appearance of strength.