The Overlooked Market Event: US, Japan, and South Korea Jointly Intervene as US Treasury Takes "Rare" Action! Is Bessent Quietly "Bailing Out" the Market?

The United States, Japan, and South Korea jointly implemented the largest coordinated foreign exchange intervention in nearly thirty years this week. This action not only targeted the depreciation pressures on the yen and the won but was also regarded as a significant measure by the US to stabilize the financial markets of its allies, Japan and South Korea, and prevent risk spillovers.

The operation covered two major Asian currencies: the yen and the won. Japanese and South Korean foreign exchange authorities supported their respective currencies by selling US dollars; meanwhile, the US intervened in the yen's exchange rate through non-USD channels, selling euros and buying yen to alleviate depreciation pressure on the yen and avoid putting pressure on the US dollar.

Currently, markets in Japan and South Korea remain under sustained pressure: South Korea's KOSDAQ index fell to its lowest point since October 2022, with significant adjustments in the technology sector; the yen and won also continued to weaken against the US dollar, raising market concerns that further currency depreciation could trigger a chain reaction of volatility in Asian assets.

Unlike past efforts focused solely on stabilizing exchange rates, this coordinated action is viewed by the market as a "bailout" for the financial markets of Japan and South Korea. Amid continued pressure on Japanese and South Korean stock markets and significant corrections in the tech sector, the US hopes to boost market confidence by stabilizing exchange rate expectations and prevent risks from spreading further.

Both Japan and South Korea are key participants in the US semiconductor and AI supply chains. Stabilizing their asset markets helps reduce the likelihood of financial risks transmitting to the technology supply chain and the US market.

Rare Tripartite Intervention by US, Japan, and South Korea Sends Yen and Won Surging

According to the UK's Financial Times, on July 31, the US Treasury instructed Goldman Sachs and Morgan Stanley via the Federal Reserve Bank of New York to sell euros and buy yen, marking the first direct participation in yen intervention in nearly 30 years.

Previously, reports indicated that Japanese authorities had deployed approximately 8.45 trillion yen (about $52.8 billion) in a single day on July 30 to intervene in the FX market. Additionally, according to Reuters, South Korean foreign exchange authorities also rarely entered the market on the same day to sell US dollars, driving the won up by 2% in a single day to a nine-month high.

Driven by the tripartite joint effort, the USD/JPY pair rapidly fell from above 162 to the 157-159 range, with the yen clearly moving away from its 40-year lows. South Korean Vice Minister of Finance Moon Ji-sung stated that South Korea is maintaining close coordination with the US and Japan; Atsushi Mimura, Japan's Vice Minister of Finance for International Affairs, also noted that US support has "gone beyond mere moral support."

US Directly Participates in Yen Intervention for the First Time, Sending Policy Signals

The direct involvement of the US Treasury in the yen's exchange rate is the change most closely watched by the market. Unlike the past reliance primarily on verbal warnings, the US rarely participated in yen intervention through actual transactions this time.

Citing informed sources, the Financial Times reported that the Federal Reserve Bank of New York implemented the intervention by selling euros and buying yen through Goldman Sachs and Morgan Stanley. Before the action, the US Treasury had signaled the possibility of intervention to several Wall Street institutions and maintained communication with the European Central Bank.

Before officially entering the market, the Federal Reserve Bank of New York released policy signals for two consecutive days. On Thursday, the New York Fed conducted a "rate check" on USD/JPY, asking dealers for current tradable rates without executing trades immediately; on Friday, it shifted to a "rate check" on EUR/JPY. The market generally believes that this operation is seen as a precursor to formal intervention.

Federal Reserve Bank of New York's "Rate Check" Operation Explores New FX Intervention Methods

Alex Cohen, FX Strategist at Bank of America Securities, stated in a report that "rate checks" fall between verbal intervention and actual intervention, representing a new tool the US Treasury has begun using this year to release policy signals to the market without actually deploying capital. However, he also warned that if lacking follow-up actual actions, the market may still retest the credibility of the authorities' policies.

Notably, the Federal Reserve Bank of New York partially chose to operate on EUR/JPY rather than USD/JPY this time. Analysts believe that this indicates the US may hope to exert influence through non-USD currency channels, alleviating depreciation pressure on the yen while avoiding additional pressure on the US dollar.

On the Japanese side, large-scale intervention in the FX market had already occurred. According to official data and market estimates, Japanese authorities deployed approximately 8.45 trillion yen (about $52.8 billion) on July 30 to support the yen, marking another large-scale intervention following the cumulative injection of about 11.7 trillion yen from April to May this year.

US Goal Is Not Merely Exchange Rate Stability, But Safeguarding Asset Stability of AI Allies

The significance of the US intervention this time may go beyond traditional exchange rate management.

Michael Hartnett, strategist at Bank of America, stated in his latest report that this coordinated action by the US, Japan, and South Korea resembles a "Price Keeping Operation" (PKO) in the AI era, with the core objective of preventing continuous pressure on the assets of AI supply chain allies like Japan and South Korea.

Hartnett believes that the US aims to mitigate three types of risks: First, preventing a rapid depreciation of the yen from driving a sharp rise in Japanese government bond yields; second, avoiding the spread of financial stress to Asian markets such as South Korea and Japan; and third, reducing the impact of disorderly capital flows on the US bond market.

Recently, pressure on the South Korean market has increased significantly. The KOSDAQ index fell to a low not seen since October 2022, and shares of major South Korean brokerages have continued to adjust.

Meanwhile, the AI investment boom has not noticeably cooled down. Data from Bank of America shows that semiconductor ETFs have attracted cumulative inflows of about $53 billion year-to-date. Although the Philadelphia Semiconductor Index (SOX) has retreated recently, investors continue to bet on the long-term growth of the AI supply chain.

Hartnett believes that the simultaneous occurrence of coordinated intervention and market adjustment may indicate that previous high-leverage trading is coming to an end. However, current policies are more about controlling market volatility rather than changing trends through liquidity policies.