Extremely rare! US-Japan joint intervention—what does this mean for the market?

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Japan is currently caught in a severe financial dilemma: between a yen collapse and a disintegration of the government bond market, policymakers seem to have no way out. As Japanese bond yields soar and the currency remains under sustained pressure, markets are closely watching for a signal that could reshape the global currency landscape—whether the United States is preparing to "step in personally" to assist Japan.

As previously mentioned by Wallstreetcn, Japanese Prime Minister Sanae Takaichi issued a stern warning on Sunday, vowing that the government would take "all necessary measures" to counter speculative and extremely abnormal market volatility. This statement followed wild market swings last Friday, when the USD/JPY rate plunged about 1.75% in a single day, the largest move in five months. Markets widely speculated that the catalyst for this reversal came from the New York Fed’s extremely rare "rate check" action.

According to sources cited by the media, last Friday, under instruction from the U.S. Treasury, the New York Fed called major financial institutions to inquire about USD/JPY quotes. This move is typically seen as a precursor to direct intervention in the forex market, and even as a key sign that the U.S. is ready to assist Japan in supporting the yen. The market interpreted this as U.S. and Japanese authorities being prepared to join forces to stop the yen's decline, triggering a massive short-covering in yen positions.

This potential "joint intervention" expectation is reshaping investors' risk appetites. Analysts point out that if the Fed gets involved, it means intervention will no longer be Japan acting alone, and could even spark memories of a “Plaza Accord 2.0.” With the Bank of Japan facing dual pressures to maintain bond market stability and rein in inflation, this currency defense war co-led by the U.S. could have far-reaching effects on the dollar, U.S. Treasuries, and global risk assets.

New York Fed’s Rare "Rate Check" Sends a Signal

Last Friday, after the Bank of Japan's neutral stance at its meeting, the yen was initially sold off. However, just after 11 a.m. Eastern time—typically the time when the forex market is most liquid—the Fed stepped in and asked banks for USD/JPY quotes.

The New York Fed conducts financial transactions on behalf of the Treasury, and its "rate checks" are usually a signal that authorities are concerned about a particular currency trade, often coming before direct intervention. According to The Wall Street Journal, this was a clear sign that U.S. and Japanese authorities were preparing to step in to stop the yen’s fall. As a result, the USD/JPY rate collapsed and closed near 155.80.

Notably, this action is extremely rare. According to data from the New York Fed's website, since 1996, the U.S. has only intervened in the forex market on three separate occasions, the most recent being after the 2011 Japanese earthquake, when it joined G7 nations in selling yen to stabilize the market.

According to Morning FX analysis, due to time differences, during Tokyo's late-night hours, Japan's Ministry of Finance (MOF) can request the New York Fed to "take over" and conduct intervention, using Japan MOF's foreign exchange reserves. This time, the New York Fed's rate check represented the will of the U.S. Treasury and required the signatures of Treasury Secretary Yellen (or even Trump), raising it to the level of cross-border joint intervention. This New York Fed rate check represented the will of the U.S. Treasury and required the signatures of Treasury Secretary Yellen (or even Trump), raising it to the level of cross-border joint intervention.

Previous cross-border joint interventions generally involved broader multi-currency cooperation (such as the Plaza Accord, Louvre Accord) or were in response to major shocks (Asian Financial Crisis, euro instability, Great East Japan Earthquake). However, this joint action occurred against a backdrop of no major shocks and not involving broader multi-currency cooperation, making it quite rare.

The sense of urgency among Japanese authorities stems from the dramatic plunge in the yen over the past two weeks, and the looming shadow of a "Japanese debt crisis." Previously, Prime Minister Sanae Takaichi promised to abolish the food sales tax for two years, an election pledge that sparked concerns in the market about Japan's fiscal capacity, and was even compared to the turmoil in UK gilts unleashed by former Prime Minister Liz Truss.

The Bank of Japan is currently in an extremely passive position. On one hand, officials have been warning for months that a weak yen would lead to high inflation; on the other hand, the BOJ dares not raise rates easily, fearing that a rate hike could accelerate an already fragile bond market collapse, which would spread to the stock market and the broader Japanese economy.

This "defend the exchange rate and collapse the bond market, defend the bond market and collapse the exchange rate" dilemma is what may push Japan to seek outside help. The market view is that the Bank of Japan is basically calling on the Federal Reserve to rescue it from this predicament: either the yen collapses, or the Japanese government bond market disintegrates.

The "Ghost of Plaza Accord 2.0" and Market Dynamics

This expectation of "coordinated intervention" by the U.S. and Japan is prompting Wall Street to reassess the outlook for the dollar. Last Friday, the dollar fell not only against the yen by 1.7%, but also weakened against other Asian currencies such as the Korean won and the New Taiwan dollar.

Stephen Miller of GSFM pointed out, “You can't rule out the possibility of a 'Plaza Accord 2.0' under this administration.” He believes this action echoes the 1985 Plaza Accord, when the world's major economies joined forces to drive down the dollar. Miller emphasized that the Trump administration does not view the dollar as an “exorbitant privilege,” but rather regards its status as a reserve currency as a “curse.”

Pinnacle Investment Management Chief Investment Strategist Anthony Doyle also remarked that Japan cannot fix the yen alone without triggering domestic pressure or global spillover, so a “Plaza Accord 2.0”-style coordination is not such a crazy idea anymore for some. When the U.S. Treasury starts making phone calls, it usually marks that the situation has gone beyond normal foreign exchange business.

However, Homin Lee, senior macro strategist at Lombard Odier, warned that if this is really an attempt to anchor the USD/JPY rate, then Tokyo will have to follow up with direct intervention. He noted that 160 is a clear round number, and for many Japanese voters and market commentators, it’s the key crisis threshold before early lower house elections in February.

What's Next?

For market participants, the most critical question is: “What happens next?” AT Global Markets chief analyst Nick Twidale warned that, given Sanae Takaichi’s comments and the potential U.S. involvement, traders should be highly cautious at the open on Monday, as yen shorts may be squeezed.

Brent Donnelly of Spectra suggests three possible paths:

1. Most likely path (45% probability): This rate check aimed to stabilize the market during the thin-liquidity hours of Friday afternoon, with Japan’s Ministry of Finance (MOF) likely to take real action on Sunday night or Monday during New York trading hours.
2. Secondary path (20% probability): This was only an attempt to stabilize the exchange rate at zero cost, and if there is no actual intervention to follow, once the market realizes this, USD/JPY will see a massive short squeeze, forcing the MOF to then physically intervene at the 159/160 level.
3. Macro agreement (20% probability): The U.S., Japan, and South Korea may have reached some kind of agreement (much like rumors of a Mar-a-Lago Accord), agreeing that the depreciation in the yen and won has gone too far, and to join forces in stabilizing the exchange rate.

Donnelly believes that, based on these probabilities, the downward trend in USD/JPY may continue. But he also points out that this does not necessarily mean the start of a fully weak-dollar policy. His suggested strategies are “sell EUR/JPY” and “buy AUD/USD,” believing that this logic will grow clearer over time.

Stephen Miller summed up: “Japan has been sleepwalking toward chaos for a long time… The problem is that you always have to pay the price eventually, and I suspect now’s the time. We’re witnessing something unprecedented—the U.S. has taken action.”

Risk Warning and DisclaimerMarkets have risks, investments need to be made cautiously. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial conditions, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Invest accordingly and at your own risk.

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