US President Donald Trump and Japanese Prime Minister Sanae Takaichi. The joint action comes against the backdrop of the Japanese currency falling to 40-year lows in July. Photo: AP/Wikimedia CommonsThe United States and Japan on Monday (August 3) confirmed a joint coordinated intervention in the Japanese currency market aimed at smoothing out excessive volatility in the yen. The move, taken on Friday, strengthened the yen against the US dollar, ringing potential alarm bells for Indian markets.The joint action — the first since 2011 — was under the US-Japan Finance Ministers’ Joint Statement issued in September 2025, with both countries keeping the door open for further joint intervention efforts. This comes against the backdrop of the Japanese currency falling to 40-year lows in July.“They have a weakening yen, and they wanted a little bit of help. And we’re always there for Japan,” Reuters quoted US President Donald Trump as saying in response to a reporter’s query. The Japanese government may have sold as much as $59 billion in securities on Thursday to support its currency, according to a Reuters report citing central bank data.Here’s what led the two countries to intervene and the likely impact it might have on Indian markets.Behind the joint interventionThe US has a vested interest in the yen’s performance, with a weaker yen leading to US Treasury bond yields shooting up. With the Japanese government holding a large share of US Treasuries, a weak yen may force Japan to sell US bonds, further elevating US bond yields. With yields already under pressure owing to elevated inflation and expectations of interest rate hikes by the Federal Reserve, a joint intervention by both countries helps manage market expectations.“Obviously Japan needs to increase interest rates (to curb inflation), but none of the central banks are keen to raise rates at this point because it could affect demand. That’s why this sort of intervention is there,” said Pankaj Pandey, head of research at ICICI Securities.“The US debt has climbed to $40 trillion, so every 10-20 basis points of increase in bond yields will put a lot of pressure on the US balance sheet. Hence, the US might have stepped in to protect the dollar,” said Sunny Agrawal, head of research at SBICAPS Securities. One basis point equals 0.01%, that is, 100 basis points equal 1%.Story continues below this adAlso read | In Indo-Pacific, the slow and steady growth of Indian powerThe Bank of Japan kept its short-term interest rates steady on Friday but signalled that there might be a need to raise rates soon as underlying inflation threatened to exceed its 2% target. While the US has also avoided hiking interest rates so far, the CME Fedwatch tool shows a nearly 65% probability of a 25-basis-point rate cut in the Fed’s next meeting in September.After the Monday announcement by the Japanese finance ministry, the yen rose by around 1% to 155.23 a dollar, which was the strongest level in three months, before paring some gains to trade around 156.75. This followed the currency gaining over 3% in the last two sessions of the previous week.The Indian market has a significant exposure to the yen, especially through carry trades. This trade facilitates traders borrowing in a cheaper currency like the yen to buy securities in emerging markets like India to take advantage of the interest rate differential.While analysts are unsure about current numbers, a report by Elara Capital from August 2024 showed India’s yen carry trade exposure stands at around $21 billion, or about 2.2% of the total foreign institutional investor (FII) holdings.Story continues below this adNewsletterFollow our daily newsletter so you never miss anything important. On Wednesday, we answer readers' questions.SubscribeWhile unwinding of the yen carry trade may lead to an FII exodus in the shorter run, crude prices remain a bigger concern for the Indian market currently. “We haven’t been a big beneficiary of FII inflows as of now, so most of the negatives are already there in terms of pressure. For us, the bigger macro issue is the stabilisation of crude price,” said Pandey.The Indian stock market saw a positive FII inflow of $2.1 billion in July after four straight months of outflow. This inflow, however, was nothing compared to the $27.2 billion foreign outflows the Indian stock market has seen so far in 2026.The impact on the Indian market from the yen’s trajectory would be dependent on both the current levels of exposure and the quantum of joint intervention undertaken by the US and Japan.“Ultimately, you have to dump something as the US to buy yen, right? We would have to see if that would be the euro or some other currency. But that would have a net cumulative impact on the dollar index movement also, which again would have an impact on commodities and emerging markets. But it is difficult to quantify how much impact we will have,” said Agrawal.