Yen holds gains after Japan, US confirm joint intervention, signal more action

By Makiko Yamazaki and Leika Kihara

TOKYO, Aug 3 (Reuters) - The Japanese yen held gains above recent 40-year lows on Monday after Japan and the United States launched a rare joint yen-buying intervention and vowed to take further action if needed to shore up the currency.

The intervention on Friday underscored both countries' resolve to prevent a selloff in the yen and Japanese government bonds from causing global spillovers, such as adding upward pressure on already rising U.S. Treasury yields, analysts said.

The joint intervention, announced by Japan's finance ministry and U.S. Treasury Secretary Scott Bessent, was the first since 2011's coordinated action to weaken the yen following a devastating earthquake in eastern Japan.

Central bank data indicated on Monday that Japan may have spent as much as $36.58 billion buying yen during Friday's joint intervention.

The U.S. Treasury sold euros to buy yen, three sources familiar with the matter said, though the amount spent was not known. A Treasury spokesperson did not respond to requests for further information on the joint operation, which utilized a COVID-19 era Federal Reserve backstop for major central banks.

President Donald Trump said on Sunday the United States was helping Japan prop up the yen as a sign of friendship and to help the world economy.

Aside from helping Japan as a strategic ally in Asia, the intervention would help the United States address concerns over extraordinary weakness in the yen that offsets the boost from Trump's tariffs, analysts say.

In their statement, Japan's finance ministry said Friday's yen-buying intervention with the U.S. Treasury Department "countered excessive volatility and disorderly movements in the Japanese yen in recent months".

"We will not hesitate conducting further coordinated intervention," Finance Minister Satsuki Katayama told reporters on Monday, a sentiment echoed by Bessent.

The yen surged more than 1% to 155.20 per dollar after the announcement, its strongest since early May and well off the 40-year low near 164 hit last month, as traders remained on alert for more intervention. It was trading at 156.92 on Monday.

Katayama declined to comment when reporters asked whether the authorities stepped in again on Monday.

The impact of Japan's recent interventions, including a solo action between late April and early May, has been short-lived, causing only a brief rebound in the yen.

But some analysts said that U.S. involvement added credibility, prompting sizable covering of yen short positions. Since 1995, coordinated yen interventions have had longer impacts than unilateral ones.

The intervention does little to alter Japan's difficult economic fundamentals, including a large debt load, overly accommodative monetary policy and growing concerns about Prime Minister Sanae Takaichi's desire for more fiscal stimulus.

Intervention can't solve that problem, even if it gives the currency a short boost, said Mark Sobel, a former longtime Treasury official who is now U.S. chair of the OMFIF financial think tank. "If Japan wants a higher yen, it needs to address the monetary and fiscal policy concerns."

BOJ IN SPOTLIGHT

Japan's top currency diplomat, Atsushi Mimura, told reporters on Monday that the joint action was the "culmination" of the U.S.-Japan alliance.

"We will continue to align (currency policy) with the Bank of Japan's monetary policy," he said, suggesting the government will work hand in hand with the central bank in arresting yen falls.

"We strongly support Japan's decisive market and monetary steps to correct the substantial undervaluation of the yen," Bessent said in a separate statement on X, repeating his calls for further interest-rate hikes by the BOJ.

The remarks put the spotlight on the BOJ, which last week kept rates on hold but signalled scope for a rate hike as soon as its next policy meeting in September.

"The comments by Mimura and Bessent must be music to the ears of hawks within the BOJ," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

"I feel like a September rate hike is a done deal. It won't make sense for the BOJ to wait until October and cause another bout of yen declines."

The 2-year JGB yield, which is most sensitive to near-term monetary policy moves, briefly hit 1.545% on Monday, the highest since 1995, as markets priced in the chance of an early rate hike.

FED FACILITY AVAILABLE

Japan has been struggling to curb a relentless drop in the yen that pushes up import prices and stokes broader inflation, hitting households' wallets and Takaichi's public approval ratings.

Friday's joint intervention followed Tokyo's solo intervention worth up to $58.97 billion in New York markets a day earlier.

In a sign of further Japan-U.S. coordination, Bessent said the United States would consider increasing in coming months the size of the Federal Reserve's repurchase facility providing temporary dollar liquidity, calling the tool an "important backstop".

The comment followed the Japanese finance ministry's rare X post on Saturday that it had "a broad range of tools to address market liquidity needs," including access to the Fed's repurchase facility providing temporary dollar liquidity.

The Fed facility, introduced in 2020 to steady markets during the COVID-19 pandemic, allows Japan to raise dollar liquidity without outright sales of U.S. Treasuries, potentially easing funding pressures on Tokyo for intervention.

Still, the facility is "unlikely to change perceptions about the limits of Japan's intervention capacity, as borrowing is capped by the amount of Treasury holdings pledged as collateral," said Rinto Maruyama, FX and rates strategist at SMBC Nikko ​Securities.

(Reporting by Makiko Yamazaki and Leika Kihara in Tokyo; additional reporting by Steve Holland and David Lawder in Washington, Alun John and Vidya Ranganathan in London; Editing by Bill Berkrot, Sam Holmes, Jacqueline Wong, Susan Fenton and Sharon Singleton)