A new low in nearly forty years and the strongest since May: the US and Japan confirm a joint intervention, how far can the yen's "violent rebound" go?

After the exchange rate of the yen against the US dollar fell to its lowest level in nearly forty years, the United States and Japan intervened in the foreign exchange market together last Friday by coordinating yen purchases. This rare joint action, along with the two countries' finance ministers' unabashed declaration that they "will continue to intervene," is reshaping the dynamics of the foreign exchange market. The yen has reacted violently, rebounding sharply from multi-decade lows, while a massive speculative short position faces significant unwinding risks. However, strategists remain deeply divided over the long-term effects of the intervention. On Monday, Japan's Ministry of Finance confirmed that it coordinated yen buying operations with the US Treasury last Friday, representing an unusual measure taken by the two major allies to curb the yen's severe volatility. Previously, the yen to dollar exchange rate had briefly hit 163.73 on Thursday, marking its weakest level in about forty years. Following the news of the intervention and official announcements, the yen quickly strengthened to 157.57 on Friday, further reaching 155.23 on Monday, recovering to its strongest level since early May and significantly breaking through the key technical level of the 200-day moving average (around 158). Japan has made it clear that it "will not hesitate to carry out further coordinated interventions in the future" and has maintained close communication with the US Treasury. The Ministry of Finance emphasized that this intervention is based on the joint statement issued by the finance ministers of Japan and the US in September 2025, aimed at addressing the yen's "recent excessive fluctuations and disorderly trends." Additionally, the Ministry announced plans to utilize the Federal Reserve's "Foreign and International Monetary Authorities Repo Facility" to obtain short-term dollars through temporary swaps of US Treasury bonds, thereby replenishing its intervention arsenal. Behind the "friendship signal": Euro purchases of yen spark controversy. The loud endorsement from the US has given this intervention much greater weight than a unilateral action from Japan. US Treasury Secretary Scott S. Paulson confirmed in a statement that the US participated in the coordinated action to counter the yen's disorderly fluctuations, stating that "we will not hesitate to participate in further joint interventions." Paulson also strongly supported Japan's macroeconomic policy direction, saying the US "strongly supports Japan's decisive market and monetary measures to correct the serious undervaluation of the yen." US President Trump portrayed this as a political stance, stating to reporters aboard Air Force One that the US's involvement in the intervention is a show of support for Japan and is also a consideration for global economic stability, describing it as "more of a signal of friendship." However, doubts soon emerged in the market. Reports indicated that the US sold euros rather than dollars to buy yen during this operation, which was a drastic deviation from the traditional practice of using dollar assets to finance coordinated interventions, catching the market by surprise. Robin Brooks, a senior researcher at the Peterson Institute for International Economics, sharply pointed out that if the US was buying yen by selling euros, investors might infer that US officials are trying to avoid Japan financing through the sale of US Treasury bonds, which is essentially a distortion. Brooks believes, "This method of operation undermines the actual effectiveness of US participation in the intervention, as it inevitably leads the market to speculate why the US does not directly buy yen with dollars." In his view, this arrangement may ultimately weaken, rather than strengthen, market confidence in the yen. Record Short Positions: Unwinding Risks Intensified Just before the intervention, the market had accumulated an unusually extreme level of short positions on the yen. According to data from the US Commodity Futures Trading Commission as of July 28, net short positions on the yen held by asset management companies and leveraged funds had risen to the largest scale since 2024, while hedge funds' bearish levels remained close to the highest levels since 2007. This means that a significant amount of speculative capital had heavily bet on the yen's depreciation. The coordinated strike from the US and Japan instantly ignited unwinding risks for these positions. Masayuki Nakajima, a senior currency strategist at Mizuho Bank in London, pointed out that if the latest messages from the US and Japan prompt these short positions to close, there may be room for the dollar to yen exchange rate to fall further into the 155 range; if speculative positions eventually shift to net long, the yen may even approach 150. "Structural Change" or "Fleeting Moment"? However, there is a significant divergence of opinions among market strategists regarding the strategic significance of this joint intervention. Bullish proponents believe this marks a "game-changing" moment. Junpei Tanaka, deputy manager of Mizuho Bank's foreign exchange spot trading team, stated that the joint intervention demonstrates a willingness to stop the yen's depreciation at all costs, signifying that the foreign exchange market has entered a new landscape, and the upward potential for the dollar against the yen will be limited as a result. Masahiro Yamaguchi, head of investment research at Sumitomo Mitsui Trust Bank, emphasized that the dollar to yen rate breaking below the 200-day moving average signifies that most investors' returns have been wiped out, leading to losses; with the US stepping in directly, this is a massive change for speculative tradersbetting on a weaker yen has become a difficult operation, as traders will be more skeptical that any recovery in the exchange rate will trigger more interventions. Yugo Tsuboi, chief strategist at Daiwa Securities, pointed out the core change: when Japan acted unilaterally, it was constrained by the size of its foreign exchange special accounts and the permission to sell US Treasury bonds; however, after US intervention, the scale of available funds for intervention and operational convenience underwent a qualitative change, with the market having almost no concept of the upper limit of deployable ammunition, and this uncertainty itself is suppressing shorts. Tony Sycamore, an analyst at IG Australia, stated that such joint interventions are generally reserved for crisis periods in history, thus the current US-Japan joint effort is entirely unexpected and reflects a commitment to curb the yen's excessive weakness that is stronger than anticipated; however, Soren Chananana, chief investment strategist at Saxo Markets, pointed out that history shows authorities often resort to "sequential interventions" rather than single actions, especially when the market quickly retraces initial moves. US support transforms intervention from a unilateral effort by Japan into a coordinated policy signal, making it much more challenging for the market to contest this joint willingness. On the other hand, skeptics argue that the short-term effects of the intervention are difficult to a trend reversal. Gareth Berry, a strategist at Macquarie Group, threw cold water on the bulls: "The Japanese Ministry of Finance currently has a limited window of opportunity to make some damage on the charts and break through support levels. They do not have infinite ammunition, nor does the US Treasury. They must quickly change the market's sentiment about that established four-year upward trend; otherwise, the market will treat this dip as a better entry point to re-establish long positions, and the trend will re-establish itself, losing any opportunity." He believes that for this round of intervention to be effective, there must be clear signs of "damage" left on the chartsalthough the 200-day moving average has now been breached, multiple key support levels must be continuously destroyed; if they cannot even break below 155, it indicates that the authorities lack the determination to do whatever it takes, and the market will seize on that hesitation to counterattack. Gerald Gant, chief investment officer at Reed Capital, bluntly stated that joint intervention will not have a meaningful impact on the strengthening of the yen. "Currency intervention is only useful in the short term; the effectiveness of sustained intervention will only diminish. Whether the yen can achieve meaningful and sustainable appreciation fundamentally depends on the actions of the Bank of Japan." Wang Rongren, fixed income portfolio manager at Hanya Investment, added that the weakness of the yen fundamentally reflects ongoing market concerns about Japan's monetary and fiscal policy setup, "unless these fundamental issues are addressed, merely relying on intervention is unlikely to lead to a lasting reversal." The founder of Pelham Smithers warned against repeating the mistakes of the UKs "Black Wednesday" in 1992. At that time, the UK government tried to defend the pound in the foreign exchange market but ultimately failed, leading to one-way bets by macro funds and the collapse of the pound. He believes that if this government intervention is seen as a failure, it could trigger a genuine run on the yen, further exacerbating Japan's inflation outlook. The Road Ahead: Increased Bidirectional Volatility, with Fundamentals Remaining Dominant Although the joint intervention temporarily reduced the dollar to yen exchange rate, most analysts agree that to sustainably reverse the yen's weakness, fundamental support is still requiredthis could come from the Bank of Japan tightening monetary policy further, a decline in US yields, or improved market confidence in Japan's fiscal outlook. Tsutomu Nakamura, a foreign exchange analyst at Gaitame.com, stated that after the effects of the intervention fade, the dollar to yen exchange rate may rise back to around 159, but it is unlikely to return to previous extreme levels; the yen may still rise to the 150 level by the end of the year. "This does not mean we have entered a long-term bullish market for the yen," Chananana of Saxo Markets said, "The joint intervention has indeed changed the risk-reward ratio for shorting the yen in the short term. However, for the yen to truly strengthen, it fundamentally still needs support from fundamentals, which may depend on the Bank of Japan further tightening monetary policy, declining long-term US rates, or improved market confidence regarding Japan's fiscal outlook."