Japan to Announce Joint US-Yen Intervention, Sources Say

Critics had said Japan could face constraints to continued yen-buying because selling down its huge Treasury holdings to fund such action could cause an unwelcome spike in U.S. yields. The Fed repo facility sidesteps that risk.

Tokyo's initial intervention came hours before the BOJ decided Friday to keep monetary policy steady while signaling a strong chance it would raise interest rates soon. A widening rate differential with the U.S., where the Federal Reserve has shifted to a more hawkish stance, has been a key factor in the dollar's rise against the yen.

Shortly after BOJ Governor Kazuo Ueda held a press conference on the central bank's decision, the yen spiked in what markets suspect was another bout of yen-buying intervention by Tokyo. Katayama's top currency diplomat, Atsushi Mimura, told reporters after the spike that he would "respond in close coordination with monetary policy," suggesting the MOF and BOJ were working hand in hand.

Some analysts saw the Japan-U.S. cooperation as driven by Washington's concern over rising Treasury yields, which could worsen if Tokyo failed to prevent a selloff in the yen and Japanese government bonds. "Both the U.S. and Japan face risks of inflation turning hot and leaving their central banks behind the curve," former BOJ official Nobuyasu Atago told Reuters. "They see merits in cooperating."

Highlighting Japan's concern over JGB yields, Economy Minister Minoru Kiuchi said Sunday the government will step up efforts to enhance communication with markets. "It's very important to maintain market trust in Japan's fiscal sustainability," Kiuchi, known as a fan of expansionary fiscal and monetary policy, told a television talk programme.

The joint intervention underscores a rare alignment between the world's two largest bond markets. For traders, the Fed repo facility effectively removes the ceiling on how much Tokyo can spend defending the yen. The operation, one official said, is still ongoing.