US Treasury's Yen Intervention Firepower Limited to $38 Billion, JPMorgan Estimates

The U.S. Treasury has limited liquid resources to support a potential joint intervention in currency markets to bolster the Japanese yen, but could significantly expand its firepower through unconventional measures, according to an analysis by JPMorgan Chase & Co.

A Limited War Chest

Strategists at the bank, including Junya Tanase, wrote in a report that the Treasury's Exchange Stabilization Fund (ESF) held assets that could be readily deployed for intervention totaling approximately $38 billion as of June. This figure is composed of about €13 billion and $25.5 billion in assets.

JPMorgan noted this amount is relatively small when compared to the scale of Japan's unilateral interventions in recent years, which have ranged from approximately $35 billion to $60 billion in a single operation. The analysis comes amid heightened coordination between Washington and Tokyo, with U.S. officials stating they have acted to counter "disorderly" yen movements and are prepared to assist Japan again if necessary.

Potential for Expansion

Despite the limited ready cash, JPMorgan stated the Treasury could substantially increase its intervention capacity. The department could theoretically mobilize up to $187 billion by converting its holdings of the International Monetary Fund's Special Drawing Rights (SDRs) and swapping other foreign currency assets into U.S. dollars.

Ad

Furthermore, any intervention could be effectively doubled in size if the Federal Reserve participated alongside the Treasury. However, the strategists cautioned that the Treasury's ability to intervene is not unlimited, as the ESF's resources are finite and expanding them would likely require an appropriation from Congress.

Market Outlook and Historical Context

Historically, U.S. interventions have been much smaller, typically in the $1 billion to $2.5 billion range. The last joint U.S.-Japan intervention to buy yen occurred on June 17, 1998, and was a relatively small, one-time operation. The currency pair returned to its pre-intervention levels within weeks, highlighting a limited appetite at the time for sustained market action.

JPMorgan's strategists believe the more supportive stance from U.S. authorities should reduce the risk of the dollar breaking above the 164 yen level. Nevertheless, they assess that a coordinated intervention is unlikely to drive a sustained yen appreciation below 150 per dollar, as neither country appears to desire a significantly stronger Japanese currency.