A Few Good Yen – America Rescues Japan

It has been a rough couple of years for the Japanese yen. One of the top safe-haven assets in the world has been in a funk, from 2024’s yen carry trade unwind to the recent four-decade low against the US dollar. To prop up the currency, Tokyo has committed to intervening in global foreign exchange markets. Now Japan has received some help from the United States. Intervention might be a stopgap to stop the bleeding, but not a permanent solution for Japan.

12 Angry Yen

Financial markets had suspected that Japanese officials intervened in forex markets to bolster the yen against the greenback. The currency registered sharp swings during the July 30 and 31 sessions, rebounding from its 40-year low. Tokyo never confirmed it had intervened, but when there is an enormous jump or notable decline, investors typically know there has been an intervention.

Then, during President Donald Trump’s cabinet meeting at Camp David, a Reuters photographer snapped an image of Treasury Secretary Scott Bessent’s “To-Do List” that read: “Buy Japanese Yen (JPY) $5-10 bil.” This was in addition to Bessent’s complimentary remarks about the government, the economy, and how the currency is significantly undervalued.

Heading into the trading week, Washington and Tokyo confirmed a coordinated effort to lift the yen. Officials announced that the Japanese finance ministry conducted a yen-buying operation with the United States on July 31. Market watchers estimated that Japan spent about $60 billion to address the "excessive volatility and disorderly movements" of its currency. The Federal Reserve Bank of New York sold approximately $10 billion in euros for yen on behalf of the Treasury Department.

Further action could be taken. “Treasury remains attentive and in close communication with our counterparts at [Ministry of Finance] and [Bank of Japan]. We will not hesitate to participate in further joint intervention,” Bessent said on X.

President Trump said it was a "signal of friendship,” telling reporters aboard Air Force One on August 2: "They wanted a little bit of help, and we’re always there for Japan.”

But what makes the situation even more compelling is that the current administration may have prevented Tokyo from selling US Treasury securities to finance the intervention by selling euros instead of dollars to buy yen. With the US government bond market already entrenched in substantial volatility, a major foreign debt holder selling off Treasurys would exacerbate conditions.

For everyone not paying attention to global forex markets, the key question is: why?

It’s Raining Yen

Late last month, the USD/JPY currency pair reached its lowest level since 1986, a year marked by Ronald Reagan as president, the Iran-Contra Affair breaking out, and the New York Mets defeating the Boston Red Sox in the World Series. While the yen’s weakness is nothing new, when it slumps to multi-decade lows, it calls for intervention.

The decline stems from the canyon-sized gap between the Federal Reserve and the Bank of Japan (BOJ). The Fed's key policy rate sits between 3.5% and 3.75%, and investors are largely penciling in at least one-quarter-point rate hike this year. The BOJ’s benchmark rate is just 1%. While the central bank has been raising interest rates to combat inflation, economists think monetary policymakers will hit the pause button due to surging government bond yields amid worries that Prime Minister Sanae Takaichi’s economic proposals will be costly.

The war is also playing a factor in Japan’s challenges. Geopolitical tensions and the war-driven oil shock have hammered the major energy importer. When crude prices surge, the yen will slump due to a widening trade deficit and growing demand for dollars.

A Tokyo Story

White House officials have often said that “America First doesn’t mean America Alone.” The administration has shown that it is willing to do what it takes to support key allies, whether Argentina in Latin America or now Japan in Asia. Washington’s signal of assistance might stop the hemorrhaging, as it did in Buenos Aires last year. But whether it permanently resolves the situation is unlikely.