Extremely rare! U.S.-Japan joint intervention, what does this mean for the market?

# Source: Wall Street Insights

By Ye Zhen

The Federal Reserve Bank of New York’s rare "rate check" on the Japanese yen is being regarded as a key signal that the US is preparing to "step in personally" to rescue the market. If a joint US-Japan intervention materializes, it will not only mean a bloodbath for yen short-sellers, but could also spark speculation about a "Plaza Accord 2.0", fundamentally reshaping the pricing logic of the global forex market and risky assets.

Japan is caught in a severe financial dilemma: policymakers seem to have no way out between a yen collapse and a breakdown of the government bond market. As Japanese bond yields soar and the currency remains under pressure, the market is closely watching a signal that could alter the landscape of the global forex market—whether the US is preparing to "step in personally" to assist Japan.

As previously reported by Wall Street Insights, Japanese Prime Minister Sanae Takaichi issued a stern warning on Sunday, pledging that the government will take "all necessary measures" to address speculative and extremely abnormal market fluctuations. This statement followed the sharp market volatility last Friday, when the USD/JPY exchange rate plummeted by approximately 1.75%, marking its largest single-day gain in five months. The market widely speculates that the catalyst for this reversal stemmed from the Federal Reserve Bank of New York’s highly unusual "rate check" move.

According to media reports citing informed sources, the Federal Reserve Bank of New York, acting on instructions from the US Treasury Department, called major financial institutions last Friday to inquire about USD/JPY exchange rate quotes. This move is typically seen as a precursor to direct forex market intervention, and even a key signal that the US is ready to assist Japan in propping up the yen. The market interpreted this as a sign that US and Japanese authorities are prepared to join forces to stem the yen’s decline, triggering large-scale short-covering of the yen.

This expectation of potential "joint intervention" is reshaping investors’ risk appetite. Analysts point out that if the Federal Reserve steps in, it would mean that the intervention is no longer a solo effort by Japan, and could even spark comparisons to a "Plaza Accord 2.0". With the Bank of Japan facing dual pressures of maintaining bond market stability and curbing inflation, this US-participated exchange rate defense could have far-reaching impacts on the US dollar, US Treasuries, and global risky assets.

## The Federal Reserve Bank of New York’s Rare "Rate Check" Sends a Signal

Last Friday, the yen initially came under selling pressure following the Bank of Japan’s neutral policy meeting. However, shortly after 11:00 a.m. Eastern Time—a period typically characterized by peak liquidity in the forex market—the Federal Reserve stepped in and asked banks for USD/JPY quotes.

The Federal Reserve Bank of New York conducts financial transactions on behalf of the Treasury Department, and its "rate checks" are usually signals that authorities are concerned about trading conditions for a particular currency, often preceding direct intervention. According to the Wall Street Journal, this is a clear signal that US and Japanese authorities are preparing to intervene to halt the yen’s slide. In response, the USD/JPY exchange rate plummeted and closed around the 155.80 level.

Notably, this move is extremely rare. According to data from the Federal Reserve Bank of New York’s website, the US has intervened in the forex market on only three separate occasions since 1996, with the most recent being a joint effort with G7 nations to sell yen and stabilize the market following the 2011 Japan earthquake.

Analysis from Morning Forex indicates that due to time zone differences, during the late-night hours in Tokyo, Japan’s Ministry of Finance can request the Federal Reserve Bank of New York to "take over" and act as its agent for forex intervention, with the New York Fed using Japan’s foreign exchange reserves for such operations. However, this latest rate check by the New York Fed represents the will of the US Treasury Department, requiring the signature and confirmation of US Treasury Secretary Bessent (and possibly even Trump), thus elevating it to the level of a cross-border joint intervention initiative.

Past cross-border joint intervention efforts have typically involved broader coordination across multiple currencies (such as the Plaza Accord and the Louvre Accord), or were in response to major shocks (the Asian Financial Crisis, euro instability, the Great East Japan Earthquake). However, this joint action is taking place against a backdrop of no major shocks and without broader multi-currency coordination, making it a rather uncommon occurrence.

The sense of urgency among Japanese authorities stems from the yen’s sharp plunge over the past two weeks and the subsequent specter of a "Japanese bond crisis". Earlier, Prime Minister Sanae Takaichi pledged to exempt food from the consumption tax for two years, an election promise that sparked market concerns about Japan’s fiscal financing capacity, drawing comparisons to the UK bond market turmoil triggered by former British Prime Minister Liz Truss.

The Bank of Japan is currently in an extremely passive position. On one hand, officials have been warning for months that a weak yen would lead to high inflation; on the other hand, the Bank of Japan dare not raise interest rates easily. A rate hike could accelerate the collapse of an already fragile bond market, which in turn would spill over into the stock market and the broader Japanese economy.

It is this dilemma of "defending the exchange rate would trigger a bond market collapse, while defending the bond market would trigger an exchange rate collapse" that has forced Japan to potentially turn to external assistance. Market opinions suggest that the Bank of Japan is essentially asking the Federal Reserve to bail it out of this predicament: either the yen collapses, or Japan’s government bond market disintegrates.

## The Ghost of "Plaza Accord 2.0" and Market Game Theory

Expectations of such "coordinated intervention" by the US and Japan have prompted Wall Street to reassess the outlook for the US dollar. Last Friday, the US dollar weakened not only by 1.7% against the yen, but also against other Asian currencies such as the South Korean won and the New Taiwan dollar.

Stephen Miller of GSFM noted, "You cannot rule out the possibility of a 'Plaza Accord 2.0' under the current administration." He believes that this move bears echoes of the 1985 Plaza Accord, when major global economies joined forces to weaken the US dollar. Miller emphasized that the Trump administration does not view the US dollar as an "exorbitant privilege", but rather regards its status as a reserve currency as a "curse".

Anthony Doyle, Chief Investment Strategist at Pinnacle Investment Management, also stated that Japan cannot fix the yen on its own without triggering domestic pressures or global spillovers, so a coordinated outcome similar to "Plaza Accord 2.0" is no longer a crazy idea for some. When the US Treasury Department starts making phone calls, it usually signals that the situation has gone beyond the realm of ordinary foreign exchange matters.

However, Homin Lee, Senior Macro Strategist at Lombard Odier, warned that if this is a genuine attempt to anchor the USD/JPY exchange rate, Tokyo must follow up with actual intervention actions. He pointed out that 160 is a simple psychological level, and for many Japanese voters and market commentators, it is a key crisis indicator ahead of the early lower house election in February.

## What Happens Next?

For market participants, the most critical question is "what happens next". Nick Twidale, Chief Analyst at AT Global Markets, warned that given Sanae Takaichi’s remarks and the potential US involvement, traders should exercise extreme caution at Monday’s market open, as yen short-sellers could face a squeeze.

Brent Donnelly of Spectra outlined three possible scenarios:

1.  **Most Likely Scenario (45% probability)**: This rate check was aimed at stabilizing market conditions during Friday afternoon’s illiquid trading hours, and Japan’s Ministry of Finance (MOF) will subsequently take actual action either late Sunday or during Monday’s New York trading session.

2.  **Secondary Scenario (20% probability)**: This is merely an attempt to stabilize the exchange rate at zero cost. If no actual intervention follows, once the market realizes this, USD/JPY will trigger large-scale short-covering, forcing the MOF to ultimately conduct physical intervention at the 159/160 level.

3.  **Macro Agreement Scenario (20% probability)**: The US, Japan, and South Korea may have reached some form of agreement (similar to rumors of a Mar-a-Lago-style deal), agreeing that the yen and won have depreciated too much and will join forces to stabilize exchange rates.

Donnelly believes that based on these probabilities, the downward trend of USD/JPY is likely to continue. However, he also pointed out that this does not necessarily mean the start of a policy of broad US dollar weakness. He recommended strategies such as "selling EUR/JPY" and "buying AUD/USD", arguing that this logic will become clearer over time.

Stephen Miller concluded, "Japan has been sleepwalking towards chaos for a long time... The problem is that you have to pay the price someday, and I suspect that day is now, and we are witnessing something unprecedented—the US has taken action."

## Risk Warning and Disclaimer

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