Summary of Key Points
The United States and Japan have jointly intervened in the foreign exchange market for the first time in 15 years. On the surface, this is aimed at stabilizing the Japanese yen exchange rate, but in reality, it is an attempt by the U.S. to prevent Japan from selling its U.S. Treasury bonds due to a sharp decline in the yen and thereby driving up U.S. interest rates. Although the yen briefly rebounded by 4% after the intervention, its long-term impact is limited because the underlying issues (Japan's low interest rates and the uncertainty of Federal Reserve policy) remain unresolved. At the same time, the turmoil in the U.S. Treasury market has triggered a reconfiguration of the global asset allocation framework, with traditional stock-bond hedging strategies no longer effective. New safe-haven assets such as gold and commodities are gaining popularity.
I. Supporting the Yen = Protecting U.S. Treasuries? The U.S.'s Hidden Intentions Are Unveiled
Japan is the largest overseas holder of U.S. Treasury bonds, holding $1.14 trillion as of the end of May. If the yen continues to plummet, Japan would have to sell its U.S. bonds to buy dollars in order to stabilize the exchange rate. This would increase the supply of U.S. bonds and drive up their yields (the interest returns on these bonds), raising the cost for the U.S. government to borrow money (given that the total value of U.S. Treasury debt has already exceeded $40 trillion).
By participating in the joint intervention, the U.S. is trying to break the cycle of "yen depreciation → sale of U.S. bonds → rise in bond yields." More importantly, the U.S. has called for the expansion of the FIMA (Foreign Exchange Market Intervention Account) repurchase program, allowing Japan to use its U.S. bonds as collateral to directly exchange for dollars without actually selling them. This essentially provides Japan with emergency funds, stabilizing both the yen and the U.S. bond market.
II. The Short-Term Effect of the Intervention Is Transitory; Long-Term Success Depends on Central Bank Policies
In the short term, the intervention did cause the yen to rise: the dollar fell from 163.8 to 157.2 against the yen within five days, a gain of over 4%. However, this improvement was brief, as the yen rebounded to 157.7 on August 4th due to unresolved issues:
- The Japanese Central Bank Does Not Raise Interest Rates: Japan's interest rates are nearly zero, making the yen relatively cheap. Investors are willing to borrow yen to buy higher-yielding assets (such as U.S. stocks), which keeps the yen from appreciating.
- The Federal Reserve May Continue to Raise Interest Rates: If the Fed raises rates again, the dollar will become more valuable, putting pressure on the yen.
- Oil Price Inflationary Pressure: Tensions in the Middle East are driving up oil prices, which could lead to increased inflation in the U.S. and raise expectations of further Fed rate hikes, putting additional pressure on the yen.
UBS has explicitly stated that the yen's rise will not be sustainable unless the Japanese Central Bank significantly raises interest rates.
III. Deep-Ranging Risks: The Federal Reserve's Credibility Is at Stake, and Arbitrage Trading Poses Threats
1. Deteriorating Fed Credibility: Markets no longer believe the Fed can control inflation effectively. Rates were previously expected to rise only in 2027, but now that expectation has been moved up to the end of 2026, with yields on 10-year U.S. bonds projected to reach 4.85% by year's end. If the Fed hesitates to raise rates, bond yields will increase further, weakening the yen.
2. Arbitrage Trading Could Collapse: For a long time, investors have been borrowing cheap yen to buy higher-yielding assets (such as U.S. tech stocks or Mexican pesos) for over $1 trillion in total. If the yen suddenly strengthens significantly, these investors would likely sell their positions to repay the yen, potentially triggering a global collapse of risky assets, similar to a domino effect.
IV. A Shift in Global Asset Allocation: Traditional Strategies Are No Longer Effective
Over the past 20 years, stocks and bonds have exhibited an inverse relationship—when one market fell, the other rose, providing mutual hedging. However, this has changed. Data from UBS shows that the correlation between the S&P 500 and 10-year U.S. bond yields has dropped to -0.69 (the lowest in nearly 30 years), indicating that buying bonds as a safe-haven is no longer effective. Investors need to reconsider their strategies:
- New Safe-Haven Assets: DBS Bank recommends increasing exposure to commodities and A-share markets; BlackRock suggests investing in gold (with a 2%-5% allocation), and predicts that the price of gold could reach $5,300 per ounce by 2026.
- Moving Away from Long-Term Bonds: Investors used to rely on long-term bonds for stable returns, but now they need to switch to assets with lower correlations, such as hedge funds (which are largely uncorrelated with stocks and bonds).
In summary, the U.S.-Japan intervention is a temporary measure; the long-term strength of the yen will depend on the policies of the respective central banks. The turmoil in the U.S. bond market is forcing global investors to reevaluate their asset portfolios as traditional strategies are becoming ineffective. Ordinary investors should also be aware of these structural changes and avoid relying on the old stock-bond combination for risk protection.