US-Japan 'Joint Yen Intervention'...A New Variable Shaking Bitcoin Liquidity

▲ US-Japan joint yen intervention... Will Bitcoin rise or fall?/AI generated image

For the first time since 1998, the United States and Japan have jointly intervened to defend the value of the yen, causing risk assets, including Bitcoin (BTC), to face conflicting variables: expanded dollar liquidity and the unwinding of yen carry trades.

According to investment media FXStreet on August 4 (local time), the United States and Japan jointly intervened in the foreign exchange market last week to boost the yen, which had fallen to 164 yen per dollar, a 40-year low. The Federal Reserve Bank of New York, on behalf of the U.S. Treasury, sold euros instead of dollars, utilizing the Exchange Stabilization Fund (ESF), which is part of its foreign exchange reserves.

U.S. Treasury Secretary Scott Bessent announced that he is scheduled to meet with Bank of Japan (BOJ) Governor Kazuo Ueda at the G20 Finance Ministers and Central Bank Governors Meeting in North Carolina, USA, at the end of August. Secretary Bessent emphasized close policy coordination between the U.S. and Japan and urged the expansion of the Federal Reserve's Foreign and International Monetary Authorities (FIMA) Repo Facility.

The FIMA facility allows foreign institutions, including the Bank of Japan, to receive dollar liquidity by pledging U.S. Treasury securities as collateral, rather than selling them. This is positive for global liquidity and risk assets as it increases the supply of dollars outside the U.S. In particular, since Japan is the largest holder of U.S. Treasury securities, an increase in Treasury sales could raise U.S. long-term interest rates, increasing borrowing costs for governments, businesses, and consumers. FIMA is considered a safeguard to mitigate such shocks.

However, the unwinding of yen carry trades carries a risk in the opposite direction. If funds that borrowed low-interest yen to invest in overseas risk assets return to Japan, global liquidity could rapidly decrease. Japan's 2-year government bond yield surpassed 1.57% on Monday, indicating that the era of low-interest rates is ending faster than expected. If Japanese investors repatriate overseas funds to follow higher domestic interest rates, there is a possibility of increased selling pressure on risk assets such as Bitcoin and stocks.

Economist Mohamed El-Erian commented that the U.S. has embarked on a strategy whose success depends on policy coordination between the Bank of Japan, the Japanese Ministry of Finance, and the Prime Minister's Office. The media reported that while the unwinding of yen carry trades could pressure liquidity in the short term, monetary policy uncertainty and expanded dollar liquidity could strengthen the investment thesis for Bitcoin in the long term. Ultimately, the market will likely focus on how much the dollar supply through FIMA can offset the liquidity reduction caused by yen fund repatriation.

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