[TMGM Financial Recap] Bessent: The U.S. Will Not Hesitate to Further Support the Yen! Is the Carry Trade Unraveling?
U.S. Treasury Secretary Scott Bessent said on social media that the "coordinated U.S.-Japan foreign exchange intervention successfully curbed disorderly movements in the yen exchange rate," adding that the Trump administration strongly supports "Japan's market and monetary policy measures aimed at correcting the yen's significant undervaluation."
This marks the first time since the 1998 Asian Financial Crisis that the United States and Japan have jointly purchased yen, ending a 28-year gap. Within two days, the yen rebounded sharply from its weakest level in nearly 40 years to 157.40 against the U.S. dollar. During the morning session on August 3, USD/JPY fell further below 156.58. Markets are now reassessing a fundamental strategy that has operated for four decades: is the carry trade—borrowing cheap yen to invest in higher-yielding global assets—approaching its end?
This Intervention Is Highly Significant
Japan's unilateral interventions over the past year have already demonstrated limited effectiveness. In 2024, Japan spent approximately US$100 billion on intervention but failed to reverse the yen's depreciation trend. Between April and May 2026, Japan deployed a record ¥11.7 trillion (approximately US$73 billion), which only temporarily slowed the decline. This time, however, the situation differs in three important ways.
First, the United States has shifted from being an "observer" to an "active participant." In an interview on July 31, Bessent publicly stated that the yen "appears to be significantly undervalued," adding that "the yen is very cheap, while Japan's economy is performing well." A Reuters photograph from the July 31 cabinet meeting showed Bessent's notebook listing a "to-do" item: "Buy US$5–10 billion worth of yen." The Financial Times also reported that the Federal Reserve Bank of New York, acting on behalf of the U.S. Treasury, sold euros to purchase yen.
Second, the move has evolved from a "solo effort" into "three-way coordination." On July 31, South Korea simultaneously intervened by purchasing won and selling U.S. dollars. The rare coordinated actions by the United States, Japan, and South Korea have been interpreted by markets as a joint effort by Washington to stabilize allied financial markets and prevent volatility in Asian assets from spilling over into Wall Street.
Third, intervention has become part of a broader "policy combination." Before the intervention, the Bank of Japan delivered a clear hawkish signal at its July 31 policy meeting. Governor Kazuo Ueda stated during the post-meeting press conference that, given concerns over inflation remaining steadily above the 2% target, if monetary conditions are judged to be excessively accommodative, the central bank "would like to accelerate the pace of rate hikes." Board member Hajime Takata cast the lone dissenting vote, advocating an immediate rate increase to 1.25%. Monetary tightening combined with currency intervention has created a stronger coordinated policy approach.
The Foundation of the Carry Trade Is Beginning to Shift
The yen carry trade has been able to function for four decades because of three conditions: Japan's interest rates remained consistently lower than those of other major economies, the yen stayed stable or gradually weakened, and returns on global assets exceeded the cost of yen financing. Today, all three of these conditions are changing simultaneously.
Condition One: Interest Rate Differentials Are Narrowing. The Bank of Japan has raised its policy rate to 1%, the highest level since 1995. Governor Ueda clearly stated that "the Bank of Japan is expected to continue raising interest rates," while hinting that another hike could come in September or later. Most analysts expect the policy rate to reach 1.25% before year-end. Meanwhile, the Federal Reserve kept rates unchanged at its July 29 meeting, and market expectations for further U.S. rate hikes have eased. The U.S.-Japan interest rate differential, previously around 260 basis points, has begun to narrow, reducing the core profitability of the carry trade.
Condition Two: Currency Risk Is Increasing. For carry traders borrowing yen, the greatest risk has always been yen appreciation, which can erase all interest rate gains through exchange rate losses. Previously, the yen's long-term depreciation made this risk almost negligible. However, the joint U.S.-Japan intervention has changed the rules of the game. Bessent has explicitly stated that the United States will "not hesitate" to participate in further coordinated interventions. This suggests that policy support now limits the yen's downside while opening greater upside potential through intervention and further rate hikes. The one-way bet underlying the carry trade no longer holds.
Condition Three: Returns on Global Assets Are Becoming More Uncertain. AI-related stocks are experiencing significant corrections, long-term U.S. Treasury yields are surging, and volatility across global risk assets is increasing. With uncertain returns on the asset side, rising funding costs from higher yen interest rates, and greater currency risk, the risk-reward profile of the carry trade is deteriorating.
What Happens If Carry Trades Are Unwound on a Large Scale?
Speculative short positions in the yen remain elevated, with some data pointing to their highest levels in nine years. If a large-scale unwinding is triggered, several chain reactions could follow.
First, global risk assets could come under selling pressure. Funds borrowed in yen have been invested in U.S. Treasuries, technology stocks, emerging market assets, and even cryptocurrencies. A rapid appreciation of the yen increases the cost of repaying yen-denominated loans, forcing investors to liquidate risk assets to cover foreign exchange losses. During the Bank of Japan's rate hike cycle between July and August 2024, the unwinding of yen carry trades triggered sharp declines in both Bitcoin and global equity markets. Today's market structure closely resembles that period.
Second, the U.S. Treasury market could face additional pressure. Japan remains the largest foreign holder of U.S. Treasuries. If Tokyo needs to continue defending the yen, it may have to sell part of its Treasury holdings to obtain U.S. dollars. James Thorne, Chief Market Strategist at Wellington Altus, noted that when the world's largest foreign holder of U.S. government debt becomes a seller, long-term Treasury yields will inevitably need to be repriced. Yields on both 10-year and 30-year U.S. Treasuries have already been rising, and any large-scale Japanese selling would likely push long-term rates even higher.
Third, global liquidity could tighten. For decades, Japan exported its domestic savings to the rest of the world through carry trades, suppressing global yields and supporting a financial system built on cheap leverage. As the yen carry trade approaches a turning point, that long-standing financial order is beginning to break down. Going forward, market interest rates may increasingly be determined by capital markets themselves rather than by central banks alone.
But Is the Carry Trade Really "Ending"?
Michiyoshi Kato, Senior Advisor at Sumitomo Mitsui Trust Bank, believes the coordinated intervention demonstrates that traders underestimated the determination of U.S. and Japanese authorities to defend the yen. However, strategists at Evercore ISI warn that foreign exchange intervention without support from interest rate policy "may have only a relatively short-lived effect."
Looking at the data, the foundation of the carry trade—the U.S.-Japan interest rate differential—has narrowed but still stands at roughly 250 basis points. The derivatives market currently prices in about a 40% probability of a Bank of Japan rate hike in September, up from 30% earlier this week. This suggests that markets expect Japan's tightening cycle to be gradual rather than aggressive.
A more accurate description may therefore be this: the one-way downward trend that supported the carry trade is coming to an end, but the carry trade itself will not disappear overnight. It is evolving from an "almost risk-free one-way bet" into a "two-way strategy that requires active currency risk management." Passive strategies relying solely on continuous yen depreciation will become increasingly difficult to sustain, while actively managed carry trades are likely to remain.
As analysis from ChainCatcher noted, if this policy direction continues, it could mark a turning point for the yen carry trade and drive deeper shifts in global capital allocation. "Turning point" is a more accurate description of the current situation than "the end."
The significance of the joint U.S.-Japan intervention extends far beyond moving the yen from 163 back to 156. It represents a major shift in the United States' stance toward a strong dollar. As Washington moves from welcoming dollar strength to actively participating in efforts to weaken the dollar, the macroeconomic backdrop that has supported the carry trade for four decades is changing. Combined with the Bank of Japan's tightening cycle and rising volatility in global risk assets, the foundations of the carry trade are being dismantled one by one. In short, the era of the yen carry trade will not end overnight, but on August 3, the market caught its first clear glimpse of what that end may ultimately look like.
