Yen Interrupted

Japanese Currency Gets a Crutch

Japan confirmed a rare joint currency intervention with the US to support the struggling yen. The currency was close to slipping to a 40-year low near ¥164 per dollar but then surged 5% over three days. Japan is estimated to have spent around $88 billion in buying yen over two days.

The US has not confirmed how much it contributed, but the Treasury reportedly sold euros to buy yen. The US participating in propping up another country’s currency is unusual. Using euros, instead of dollars, is even odder.

A photographer snapped a photo of Treasury Secretary Scott Bessent carrying a note in a cabinet meeting saying: “buy Japanese Yen (JPY) $5-10 bil.”

Why America Joined the Fight

Countries usually prefer to mind their own currencies. That's why the intervention raised eyebrows.

Reasons for the team-up:

• A collapsing yen and a rout in Japanese bonds risk destabilizing global markets.
• Japan is officially the largest holder of US treasuries. Washington does not want Tokyo to start dumping them to prop up the yen.
• US long-term borrowing costs are the highest since 2007, with many central banks slashing their holdings after the Iran war began.   
• Extreme currency swings can disrupt trade and investment.

Japan's Finance Minister Satsuki Katayama said she would stand ready to step in again if needed. Scott Bessent said America would not hesitate to help.

So, Is Yen Now Saved?

Government interventions can temporarily move markets but rarely resolve the underlying problems. The yen has been under pressure for years for a few reasons:

• Central bank policy: Rates remain lower than in the US and other major economies. That means money earns higher returns elsewhere.
• Carry trade: Investors borrow cheap yen and sell it to buy higher-yielding dollar assets, increasing demand for dollars and pushing the yen lower.
• Energy shock: Japan is very dependent on Gulf oil and has been badly hit by the rising prices.
• Sanae Takaichi’s government: The PM is rolling out a $2.4 trillion 14-year spending plan. The idea is to boost growth, but investors tend to punish loose fiscal policy.

Japan's Three-Way Balancing Act

The Bank of Japan’s interest rate decision is likely to be more impactful than buying tens of billions of dollars’ worth of yen from the market. Both Japanese and US officials implied that intervention works best alongside higher interest rates. This is why investors widely expect another rate hike in the coming months.

If that happens, holding yen becomes more attractive. However, that would also raise borrowing costs at a time when the government debt-to-GDP ratio exceeds 200%, and PM Takaichi is trying to fund a historic stimulus program. Government bonds still yield less than rival countries, but they have shot up to the highest level since the 1990s.

Japan needs to figure out a way to simultaneously support the currency, stabilize its bond market, and finance ambitious spending plans.

When Countries Move Markets

Blatant currency interventions by governments are rare but not unprecedented. Sometimes countries even cooperate to ensure global economic stability.

• 2000: The ECB, the US Fed, and other major central banks bought euros to support the newly launched currency.
• 2003-2004: Japan sold yen to weaken its currency during a fragile recovery.
• 2011: Following the Tōhoku earthquake, G7 nations jointly sold yen after a sharp surge threatened Japan's economy.
• 2011-2015: Switzerland capped the franc's value against the euro, then ditched the policy.
• 2015-2016: China spent roughly a trillion dollars from its reserves defending the yuan as capital flowed out of the country.
• 2022-2026: Japan has repeatedly bought yen to strengthen it