When the dollar system begins to offer tiered protection for the exchange rate stability of certain allies through collateral and bilateral backup channels, is it reinforcing the old order, or is it revealing that the old order can no longer sustain itself through market forces alone?

The initial emergency measures have shown some effect. As the USD/JPY exchange rate approached 164, with the yen hitting a nearly 40-year low, Tokyo and Washington intervened jointly. On August 4th, the USD/JPY rate closed at 157.75, while Japan's 10-year government bond yield climbed to 2.85%. This is the latest market vote from Japan's currency and bond markets on this rare joint action: the emergency measures have shown initial effectiveness, but the fundamental solution remains unclear.

"The joint intervention in the yen exchange rate by Japan and the US is merely a stopgap measure. The capacity, target, and timing of the intervention are all unclear. It won't play a fundamental role and has nothing to do with the Bretton Woods system," stated Zhong Wei, Director of the Financial Research Center at Beijing Normal University, on August 4th.

Just a day earlier, Tokyo and Washington confirmed the action. Japanese Finance Minister Katsunobu Kato stated that on July 31st (US Eastern Time), the Ministry of Finance and the US Treasury coordinated to buy yen in response to the "excessive volatility and disorderly movements" seen in the yen in recent months. Japan will continue to maintain close communication with the US Treasury and "will not hesitate to implement joint intervention again." Japan also plans to use the Federal Reserve's FIMA Repo Facility in the future. US Treasury Secretary Scott Bessent subsequently confirmed that the coordinated action curbed the yen's disorderly fluctuations and stated that the US would not hesitate to participate again. However, neither side disclosed the intervention's target price, action period, or size limit.

Based on data from the Bank of Japan, it is estimated that Japan may have used approximately 4.7 trillion to 5.74 trillion yen on July 31st; the scale of the previous day's unilateral intervention might have been around 6.5 trillion to 9.6 trillion yen. According to media reports, the US, through the New York Fed, acted on behalf of the Treasury by selling euros and buying yen, though the specific amount has not been disclosed. The currency market's price action reflected this deterrent. The USD/JPY rate quickly fell from a high of 163.91 to a low of 155.23, with the yen appreciating by about 5% over three trading days. This was enough to trigger stop-losses on some highly leveraged yen short positions, effectively wiping out nearly two years of nominal carry trade profits. However, by August 4th, the USD/JPY rate had rebounded to 157.75, ending the yen's four-day winning streak.

The market has thus established a new boundary: the 163-164 area is no longer a zone where shorting the yen can be done without caution. Yet, the 155 level has also not become a new starting point for sustained yen appreciation. The response from the Japanese bond market was more measured. Following the joint intervention, the yield on Japan's 10-year government bond continued to climb to 2.85%. While the yen's decline was temporarily halted, it did not alleviate the pressure on the Japanese government's financing costs. The market is still awaiting further rate hikes from the Bank of Japan and continues to demand higher yield premiums for fiscal expansion, inflation, and government bond supply.

The question of whether Japan sold US Treasuries this time remains. As of the end of June, Japan's official foreign exchange reserves stood at approximately $1.29 trillion, including US dollar deposits, US Treasuries, and other dollar-denominated assets. Japan is the largest foreign holder of US Treasuries, with holdings of about $1.14 trillion. Whether Japan has sold US Treasuries, and by how much, still needs to be verified by Japan's foreign exchange reserve data, the Ministry of Finance's intervention details, and the US Treasury's International Capital (TIC) data. On the day the yen was propped up, US Treasury yields were climbing. The 10-year yield rose to 4.745%, its highest level since January 2025, and the 30-year yield briefly touched 5.274%, a level not seen since the 2007 global financial crisis. However, this might not necessarily prove that Japan was selling US Treasuries in large quantities in the open market. US Treasury trading is influenced by a mix of factors including oil prices, inflation expectations, economic data, bond supply, and term premiums, and yields eased slightly as oil prices fell.

More noteworthy is why the US and Japan were eager to establish a backup channel. With the yen at a 40-year low, the Bank of Japan found it difficult to solve the problem solely through substantial interest rate hikes. Japan's government debt is more than twice its GDP, and rising interest rates would gradually increase fiscal financing costs. However, if rate hikes are too slow, the US-Japan interest rate differential, imported inflation, and capital outflows would continue to weaken the yen. With the "front door" of rate hikes being difficult to use, the "side door" of currency intervention became an option: selling dollars and buying yen to buy time for the exchange rate.

The risk lies in the fact that Japan's foreign exchange reserves contain a large amount of US dollar securities. If intervention continues to expand, the market worries that Japan may need to sell some of its US Treasuries. If US Treasury yields rise disorderly, it would not only impact Japan but also the US, which is undertaking massive bond issuance to finance its deficits. This creates a potential doom loop: yen depreciation leads to increased Japanese intervention, which raises fears of US Treasury sales, causing US Treasury yields to rise, global financing conditions to tighten, and putting greater pressure on Japan's overseas assets and domestic finances. The US's entry into the market, ostensibly to support the yen, is actually about protecting the US Treasury market from shocks.

The US has more than one operational path. The US Treasury can use the Exchange Stabilization Fund, with the New York Fed acting as agent to sell euros or dollars to directly buy yen. Japan can also use its own dollar liquidity. The FIMA Repo Facility sits in the background, addressing the "where will the dollars come from" question, rather than directly executing yen purchases. Under the current authorization from the Federal Open Market Committee (FOMC), approved foreign official institutions can use US Treasuries held in custody at the New York Fed as collateral to obtain overnight or 7-day dollars, with a maximum outstanding balance of $60 billion per counterparty at any time. The significance of the FIMA Repo Facility lies in changing the funding method: Japan can convert "selling US Treasuries" into "pledging US Treasuries," reducing the need to sell US Treasuries en masse during periods of high market stress.

Treasury Secretary Bessent stated that one of the design purposes of the FIMA Repo Facility is precisely to prevent the spillover of overseas financial volatility into the US economy. Since US Treasuries serve as collateral, he considers it a safe liquidity backstop. As of August 4th, public information shows that Japan plans to use this facility, and Bessent has advocated for the Fed to consider expanding it. However, this does not mean that Japan has already utilized the FIMA Repo facility to obtain dollar liquidity during this joint intervention. In other words, while this channel has been opened, it is not an unlimited spigot. In Zhong Wei's view, during this intervention, the FIMA Repo Facility was merely an outlet for the US to provide funding. "Bessent wanted to intervene; Japan contributed money, the US also contributed money. Where did the US money come from? Ultimately, they chose the Fed's FIMA Repo Facility."

Thus, the US and Japan are jointly trying to suppress a cycle that could simultaneously destabilize the yen and US Treasuries. Japan is indebted to itself and holds US debt. The US needs Japan to continue holding its Treasuries and also needs to prevent the yen from collapsing. Neither can do without the other, and neither dares to let go first.

The carry trade, where investors borrow low-yielding yen, convert it to dollars, and invest in high-yielding dollar assets like US Treasuries and stocks, has been one of the most lucrative and crowded trades for over two decades. Associated with it are cross-currency bases and the wide yield spread between Japanese and US government bonds. Once the intervention hand falls, yen shorts may be forced to stop out, option hedges are adjusted, and the dollar index can be dragged down by yen appreciation. A typical systemic carry trade unwind usually involves a simultaneous fall in US stocks, a rise in volatility, widening credit spreads, and a sell-off in high-yield assets. What is happening now looks more like a partial unwind and cross-market reallocation: the yen exchange rate has been directly impacted by intervention, but the asset markets have not been affected. This explains why the US has become a relative winner for now.

Tomoo Kinoshita, Global Market Strategist at Invesco Japan, pointed out that before this intervention, the market had accumulated a large volume of speculative yen short positions. If investors' concerns about further joint US-Japan intervention rise, these positions may be forced to continue unwinding, pushing the yen higher. However, he cautioned that the impact of Japan's yen purchases on market positioning is not always consistent. This means that intervention can force shorts to stop out, but it may not permanently dismantle the carry trade. If the market believes the US and Japan will prevent a disorderly yen decline but does not believe Japan will raise rates quickly, carry funds may return after the volatility subsides. JPMorgan has already pointed out that the US Treasury's "intervention firepower is limited."

Is this mutual protection good for both Japan and the US? In the short term, it benefits both. The joint intervention shields the yen from disorderly depreciation, reduces the potential selling pressure on US Treasuries, and "buys time" for Japan's fiscal and monetary policies. In the long term, the risk landscape is being reshaped. The constraints of interest rate differentials, debt, energy, and demographics have not disappeared. The FIMA Repo Facility provides dollars that need to be repaid, not fiscal transfers. The Fed receives US Treasuries as collateral but may be expected by the market to provide more frequent cross-border liquidity support. This is precisely why this joint intervention cannot be called a "New Plaza Accord." The 1985 Plaza Accord was a multilateral macroeconomic policy coordination among major economies regarding the direction of the dollar, accompanied by fiscal, monetary, and exchange rate policy adjustments. This joint intervention is primarily a bilateral risk management exercise between the US and Japan, lacking a new exchange rate anchor or a multilateral macroeconomic adjustment plan.

Wang Yongli, former Vice President of the Bank of China, believes that labeling this joint intervention as a "New Plaza Accord" or a "New Bretton Woods Agreement" is an overstatement. The US-Japan cooperation can utilize the FIMA Repo Facility or currency swaps, and the US can sell other currencies to buy yen, among other methods, rather than being limited to the FIMA Repo Facility alone. Song Ke, Dean of the School of International Finance at Renmin University of China, noted that the Plaza Accord was a multilateral action, and Japan at that time had sufficient room for industrial and monetary policy. These are important conditions for elevating a single tool into a long-term mechanism, conditions that are currently absent, especially given the strong expectations for dollar appreciation. Therefore, he is more inclined to view this as a unilateral, short-term US exchange rate intervention aimed at easing the immediate pressure on the dollar and US Treasuries. Furthermore, the expectations for future intervention released by this action are also very important for market judgment. Some foreign bank analysts believe the joint intervention signals that the US Treasury is restoring its foreign exchange policy activism, but the US's own directly usable foreign exchange resources are limited, making the policy signal stronger than the trading volume. For sustained yen appreciation, it will ultimately require the coordination of the US interest rate cycle and Japan's domestic policies.

Kinoshita of Invesco provided a specific path for "monetary policy to take the baton," moving forward his forecast for the Bank of Japan's next rate hike from December this year to October. He believes that if the Fed does not raise rates, a BoJ hike would narrow the US-Japan interest rate differential, providing more lasting support for the yen. Accordingly, he maintains his forecast for the USD/JPY rate to be in the 150-155 range by the end of 2026. Atsushi Takeuchi, a former Bank of Japan official, believes that US support has increased the symbolic weight of the intervention and reduced investors' willingness to bet on a one-way yen decline. However, without adjustments to Japan's fiscal expansion and BoJ policy, it is difficult for intervention to bring about lasting appreciation. Therefore, this is not a redesign of the international monetary system but rather the old system adding a layer of protection under pressure. If similar arrangements continue to expand and become normalized, the world will face not just a one-time yen rescue operation, but a much larger question: when the dollar system begins to offer tiered protection for the exchange rate stability of some allies through collateral and bilateral backup channels, is it reinforcing the old order, or is it exposing the fact that the old order can no longer sustain itself through market forces alone?