The New York Fed's inquiry into the USD/JPY exchange rate last Friday caused the dollar to fall sharply against the yen by approximately 1.6%. The possibility of joint US-Japan intervention in the currency market has increased, aimed at curbing an excessively strong dollar or a rapidly depreciating yen.
According to tracking of trading desks, a team at BofA Securities led by Alex Cohen stated in a research report released on January 25 that this move represents a pivotal shift in US foreign exchange policy stance. The US may intend to suppress dollar appreciation to enhance trade competitiveness, safeguard the stability of US Treasuries, and gain additional diplomatic leverage with Japan.
Simultaneously, with Japan's general election approaching, coordinated US-Japan efforts to stabilize the exchange rate could be an attempt to buy time for the Sanae Takaichi government during the election window. Furthermore, to avoid turmoil in Japanese stock markets, this action aims to keep the exchange rate within politically acceptable boundaries rather than intending to push the yen to an extremely high level immediately.
This event last Friday shattered the market's entrenched perception of the US "non-intervention" stance. Previously, the market widely expected that, following comments by US Treasury Secretary Bethcent on recent exchange rate movements, the US was merely tacitly allowing Japan's Ministry of Finance to intervene if necessary.
However, the direct involvement of the New York Fed's trading desk altered this expectation. Over the past fifteen years, despite multiple significant fluctuations in the yen, US participation has primarily been through G7 joint statements or a posture of tacit consent, with few reports of direct action.
The BofA analyst team led by Alex Cohen emphasized in their report that this "rate check," if confirmed, signifies that the US Treasury under this administration is demonstrating a more aggressive posture than seen in previous decades. This aligns with the US's direct intervention to support the Argentine peso last autumn, indicating a greater willingness to incorporate foreign exchange policy into its broader diplomatic and economic policy toolkit.
Understanding the US Treasury's motives for intervening at this juncture is crucial. The BofA report outlines three potential strategic objectives behind this US action: 1. Prevent dollar appreciation. The US may aim to enhance its trade competitiveness by pushing down the dollar's value. If this is the primary motive, it implies broader downside risks for the dollar going forward. 2. Maintain stability in the US Treasury market. If Japan acted alone, it might need to sell US Treasuries to fund its interventions. By supporting the yen, the US can help stabilize the Japanese Government Bond (JGB) market, thereby reducing potential spillover risks to the US Treasury market. 3. Increase diplomatic leverage with Japan. As a diplomatic tool, this move aims to support its key ally Japan, particularly in the context of Japan's commitment to invest $550 billion in the US and potential increases in defense spending. The US may be using coordinated exchange rate policy to secure Japan's cooperation on broader policy objectives.
For the Japanese government, the current core demand is stability in both the exchange rate and the stock market. The BofA report points out that the Sanae Takaichi government likely hopes to keep USD/JPY in the 145–155 range in the near term, and see it retreat to the 135–145 range in the medium term, levels considered more aligned with fundamentals and interest rate differentials.
However, with the general election on February 8 approaching, the Japanese government does not desire an excessive appreciation of the yen. Sharp currency fluctuations could trigger a significant correction in Japanese stocks, which would be unfavorable for the election. Additionally, an overly strong yen would make the Bank of Japan more cautious when re-anchoring inflation expectations.
Therefore, the coordinated "rate check" is likely more about buying time for the Sanae Takaichi government during the election window and keeping the exchange rate within politically acceptable limits, rather than an immediate attempt to drive the yen to a substantially higher level.
Looking ahead, BofA Securities expects that this move by the Fed and US Treasury will likely keep USD/JPY below the 160 level in the short term, particularly before Japan's February 8 election. Should the pair re-test recent highs, the risk of joint intervention, potentially including the US, would rise significantly.
Nevertheless, analysts also caution that although expectations for two BOJ rate hikes and two Fed cuts in 2026 are supportive for the yen, the underlying uptrend for USD/JPY could resume later, given strong US economic performance and Japan's structural capital outflows. In such a scenario, as long as US inflation remains contained, the possibility of coordinated intervention will persist.
For investors, this means that simple one-way short yen strategies are no longer safe, requiring constant vigilance against potential policy resistance from both Washington and Tokyo.