US-Japan Joint Action: How A Stronger Yen Affects Indian Markets, Pg9

Key Highlights:

• The US and Japan conducted a joint coordinated intervention in the Japanese currency market on Friday to address excessive volatility in the yen.
• This action, the first since 2011, aimed to strengthen the yen against the US dollar, following its fall to 40-year lows in July.
• The intervention was based on the US-Japan Finance Ministers’ Joint Statement issued in September 2025.
• The Japanese government reportedly sold as much as $59 billion in securities to support its currency.
• A stronger yen could potentially impact Indian markets, particularly due to the unwinding of yen carry trades.

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Detailed Insights:

• The US has a vested interest in the yen's performance to prevent US Treasury bond yields from rising, as Japan holds a large share of these bonds.
• A weaker yen could compel Japan to sell US bonds, further elevating US bond yields, which are already under pressure from inflation.
• The Bank of Japan kept short-term interest rates steady but signaled a potential need to raise rates soon as underlying inflation threatened its 2% target.
• The CME Fedwatch tool indicated a nearly 65% probability of a 25-basis-point rate cut by the US Federal Reserve in September.
• India's yen carry trade exposure was estimated at $21 billion in August 2024, representing about 2.2% of total Foreign Institutional Investor (FII) holdings.
• While unwinding of the yen carry trade might lead to short-term FII outflows, crude oil prices remain a more significant concern for the Indian market.
• The Indian stock market saw FII inflows of $2.1 billion in July 2026, but overall outflows for 2026 reached $27.2 billion.

Key Concepts Involved:

• Currency Intervention: A government or central bank's action to influence the exchange rate of its currency, typically by buying or selling foreign currencies.
• Carry Trade: A strategy where an investor borrows in a low-interest-rate currency and invests in a higher-interest-rate currency to profit from the interest rate differential.
• Foreign Institutional Investor (FII): An investor or investment fund incorporated in a country other than the one in which it is investing.
• Basis Point: A common unit of measure for interest rates and other financial percentages, equal to one-hundredth of a percentage point (0.01%).