Coordinated currency buying: How Japan and the US are defending the yen
By Aboki Forex —
Coordinated currency intervention allows two or more governments to buy an under-pressure currency simultaneously, increasing market demand and signalling that several authorities are prepared to commit reserves, according to BofA Global Research.
Japan and the United States carried out coordinated yen-buying intervention on July 31. The immediate objective is to push USD/JPY below 155, a level that became a perceived floor after earlier Japanese interventions failed to break it.
How Japan funds its yen purchases
Japan typically funds yen purchases from its $1.3 trillion foreign-exchange reserve portfolio. At the end of June, those reserves included $162 billion in deposits and $929 billion in securities, much of which is believed to be held in U.S. Treasuries. Around $283 billion of the securities are estimated to mature within one year.
Combined with interest income, Japan's reserves could generate roughly $27 billion in monthly liquidity without selling assets. Yet recent intervention may have exceeded ¥10 trillion over three trading days. At that scale, the Ministry of Finance would probably need to sell securities, borrow against its Treasury holdings through the Federal Reserve's FIMA repo facility or combine both approaches.
The mechanics of coordination
FIMA permits foreign monetary authorities to exchange Treasury securities temporarily for dollars, reducing the need for outright bond sales. Japan currently faces a $60 billion counterparty limit, and the facility's relatively high cost may restrict its use.
The U.S. Treasury can fund intervention through its Exchange Stabilization Fund, which holds dollars, Special Drawing Rights and foreign currencies. The Federal Reserve can also match Treasury operations, though it is not required to do so. During the July action, Washington reportedly sold euros rather than dollars to purchase yen. Further operations may require direct USD/JPY selling once available euro reserves become limiting.
What this means for currency markets
Cooperation expands the perceived firepower beyond Japan's reserves and signals possible follow-up through faster Bank of Japan rate increases or fiscal changes. Analysts lowered their year-end USD/JPY forecast to 149 from 152 after the intervention.
For emerging market currencies like the naira, the episode shows that defending a currency takes more than dipping into reserves. It requires policy coordination, credible follow-up, and enough liquidity to change market sentiment.