The First Joint FX Market Intervention by the US and Japanese Governments
- FOFA
- 2 days ago
- 6 min read
On July 31, 2026, the US and Japanese governments conducted their first joint intervention in the foreign exchange market since 2011, which also marked their first coordinated purchase of the Japanese yen since the 1998 Asian Financial Crisis. One of the core tools that played a pivotal role in this operation was the Federal Reserve's FIMA (Foreign and International Monetary Authorities) Repo Facility.
The backdrop to this intervention was the yen plunging to a near 40-year low, approaching 164 yen to the US dollar. Following the intervention, US Treasury Secretary Scott Bessent publicly called for expanding the scale of the FIMA facility, sparking significant attention. The core information regarding this operation and the FIMA facility is as follows:
Item | Specific Information |
Historical Context | The last joint intervention to buy yen occurred during the 1998 Asian Financial Crisis; the last joint intervention of any kind was after the 2011 Great East Japan Earthquake. |
Scale and Method | The US reportedly purchased between $5 billion and $10 billion worth of yen; Japan likely conducted a unilateral intervention of approximately 6.4 trillion to 9.6 trillion yen on July 30. |
Role of FIMA | Japan can borrow US dollars from the Federal Reserve by pledging its US Treasury holdings as collateral, eliminating the need to sell Treasuries in the open market and thereby avoiding shocks to the US financial system. |
US Considerations | The core reason for US participation and the call to expand FIMA is to prevent Japan from massively dumping US Treasuries to stabilize its currency, which would cause Treasury yields to spike and endanger US financial stability. |
Behind the Intervention: Why "Save the Yen" is also "Protect US Treasuries"
Behind this seemingly contradictory joint action lies a delicate coordination based on the respective interests of both nations:
Japan's Dilemma: Excessive depreciation of the yen drives up import prices and exacerbates the cost of living, but unilateral market intervention has limited and unsustainable effects.
US Concerns: Japan is the largest foreign holder of US Treasuries, with approximately $1.14 trillion. If Japan were to massively sell off Treasuries for intervention, it would push up US long-term interest rates, increase borrowing costs, and potentially trigger a systemic risk that "evolves from dumping Japan to dumping the US."
The Ingenuity of FIMA: This tool provided a clever solution. It allows Japan to obtain the dollar liquidity needed for intervention without selling US Treasuries, achieving the dual goals of "stabilizing the yen" and "protecting US Treasuries."
The FIMA Repo Facility, formally the Foreign and International Monetary Authorities Repo Facility, is a liquidity support mechanism introduced by the Federal Reserve in the early days of the COVID-19 pandemic in 2020. During the joint US-Japan intervention in July 2026, it transformed from a little-known "backstop" into the focal point of global markets.
FIMA Explained: An Emergency "Cash-for-Bonds" Window Operating much like an "emergency pawnshop" for foreign central banks, its core rules are as follows:
Item | Details |
Operation Mechanism | Foreign central banks holding US Treasuries can use them as collateral, temporarily selling them to the Fed for US dollar cash, with an agreement to repurchase them at a slightly higher price in the future (usually overnight or within 7 days). |
Original Intent | To provide foreign official institutions with a temporary source of dollars other than "selling US Treasuries," thereby alleviating pressure on global dollar funding markets and supporting the smooth operation of US financial markets. |
Limits and Rates | The daily borrowing limit per counterparty is $60 billion. The interest rate is typically set higher than the market repo rate to ensure it is only utilized during periods of market stress. |
Actual Usage | The facility has rarely been used since its inception. It only saw a brief spike in borrowing during the market turmoil triggered by the collapse of Silicon Valley Bank in 2023. |
The Key Role in 2026: Why Was It Pushed to the Forefront?
In the 2026 joint US-Japan intervention, the FIMA facility was endowed with new strategic value, becoming a crucial link in balancing "saving the yen" and "protecting US Treasuries."
Japan's Dilemma: Holding about $1.14 trillion, Japan is the world's largest foreign holder of US Treasuries. Massively selling these to intervene in the FX market could further drive up already elevated US Treasury yields.
The FIMA Solution: Through the FIMA facility, Japan can borrow dollars against its Treasuries, securing "ammunition" for FX intervention without directly impacting the Treasury market, thus avoiding the market volatility that a massive sell-off might trigger.
US Considerations: Treasury Secretary Bessent's public support for expanding the FIMA facility is deeply rooted in reducing the risk of Japan selling off Treasuries, protecting the stability of the US financial market, and demonstrating to the market that the US has a robust intervention "backstop."
Controversies and Challenges: Not a Panacea
Despite its prominent role, the current positioning and usage of the FIMA facility have also sparked widespread discussion and concern.
"Strategic Deterrence" or "Substantive Help"? Some analysts believe Secretary Bessent's call to expand FIMA is more of a posturing move, intended to warn the market against easily challenging the resolve of the joint US-Japan intervention, rather than an indication that Japan actually lacks dollars.
Potential Market Risks: Some Wall Street institutions warn that over-focusing on a capped tool might backfire, tempting the market to "test" whether the US and Japan are truly willing to massively sell US Treasuries for intervention.
Hurdles to Expansion: Expanding the FIMA facility requires approval from the Federal Open Market Committee (FOMC), and currently, there are no clear signs of immediate action. Furthermore, large-scale use of FIMA could temporarily expand the Fed's balance sheet, contradicting its ongoing quantitative tightening efforts.
Borrowing Yen to Invest Overseas?
At this juncture (August 2026), the traditional "yen carry trade"—borrowing yen to invest overseas—is facing unprecedented challenges. Its two core foundations, "cheapness" and "stability," have been shaken, making it no longer a "timely" or safe strategy.
Although this strategy yielded handsome returns for most of the year, several fundamental shifts are dismantling its appeal.
Why Has the Core Logic Reversed?
The Foundation of "Cheap" Funding is Disappearing: The Bank of Japan (BOJ) has clearly entered a rate-hike cycle, raising interest rates to 1%, the highest since 1995. The market widely expects further hikes this year, with rising probabilities for September or October. Meanwhile, the US interest rate outlook has become uncertain, and the US-Japan yield differential—the "profit engine" of this carry trade—is rapidly narrowing.
The Expectation of FX "Stability" Has Been Shattered: The joint US-Japan intervention at the end of July, the first in 15 years to directly buy yen, signaled that the bottom line for tolerating yen depreciation has been reached, artificially putting a floor under the currency. If the intervention triggers a trending appreciation of the yen, it will directly erode or even wipe out the thin margins of the carry trade.
Risks That Cannot Be Ignored: A Potential "Stampede"
Current market conditions bear a striking resemblance to the eve of the infamous "great yen carry trade unwind" in August 2024. Back then, a sharp appreciation of the yen forced a global unwinding of leveraged positions, triggering a cascading sell-off from Japanese equities to US tech stocks.
Extremely Crowded Positions: Hedge funds' net short yen positions are currently near their highest levels since 2007. If the yen continues to appreciate, these crowded positions could trigger a "stampede" of short-covering.
Potential Ripple Effects: Analysts warn that a massive reversal of the carry trade could trigger a wave of deleveraging, with highly valued US tech stocks and risk-sensitive emerging market assets bearing the brunt.
Diverging Views: What is the Market Betting On?
Market divergence lies in judging the speed at which these risks will materialize, which in itself reflects extremely high uncertainty:
Viewpoint | Core Judgment and Rationale |
Risk is Imminent | The joint intervention is a "game-changer" that could ignite a massive unwinding. A BOJ rate hike in September is "a done deal," and the narrowing US-Japan yield gap will accelerate the reversal. The market may have overestimated the intervention's effect while underestimating fundamental shifts. |
Short-Term Risk is Controllable | Unlike the "surprise" hike in 2024, the market has adequately priced in the BOJ's policy tightening this time. As long as the US economy remains resilient, the "fertile ground" for the carry trade still exists. |
Conclusion: The End of an Era?
In summary, the strategy of "borrowing yen to invest overseas" is shifting from a "passive income" model to a state of high volatility and high risk. Some analysts view this as the end of a four-decade-long era of carry trades, suggesting that future global market interest rates will be driven more by capital flows than central bank policies.
For retail investors in the current environment, the risks of FX volatility and policy pivots associated with participating in such trades now far outweigh the potential yield differential returns.
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