The Japanese government has confirmed a rare, generational joint operation to boost its struggling currency. The United States stepped in to help strengthen the yen, and beyond sending a "signal of friendship" to Japan, there are other reasons for this action.
Japan's Ministry of Finance confirmed in a statement on Monday that the U.S. Treasury and the Federal Reserve have teamed up with their Japanese counterparts for a historic, coordinated intervention to prop up the yen. Given the domestic issues unfolding in America—from a worsening housing affordability crisis to ongoing conflicts with Iran—some might question what prompted the U.S. to take such a significant step for its ally. President Trump stated that the U.S. intervention to support the yen was a "signal of friendship."
However, Wall Street strategists believe the decision to participate was not purely an act of generosity. The U.S. economy and its financial markets stand to benefit from a stable yen just as much as Japan does. As long-term bond yields surged last week, the yen plummeted to its lowest level against the dollar in four decades, which may have served as a wake-up call for U.S. policymakers.
Recently, the yen's weakness has been accompanied by another troubling market dynamic: rising Japanese government bond yields. Typically, an increase in Japanese yields has a spillover effect on global markets, pushing up yields worldwide, including in the U.S. Japan is known as a capital-exporting nation, and higher domestic yields can incentivize private Japanese investors, such as pension funds and insurance companies, to seek investments closer to home. This is happening at a time when U.S. long-term bond yields are already near their highest levels since 2007.
Steve Englander, Head of Global G10 FX Research and North America Strategist at Standard Chartered Bank, told the media, "In recent history, when there have been phases of sharp yen weakness, it has increasingly been associated with rising Japanese yields, which then tend to spill over into the U.S." Over the past few years, Japanese authorities have intervened multiple times to boost the yen, but these large-scale purchases of yen in the open market have typically had only a temporary impact on the exchange rate and have often put upward pressure on U.S. yields as Japanese holders sell assets like U.S. Treasuries to fund their currency support.
Eric Wallerstein, Chief Macro Strategist at Clocktower Group, said, "We would prefer they didn't sell about $50 billion in U.S. Treasuries each time they intervene, with little lasting effect." As a result of this latest intervention, the yen has appreciated nearly 5% from its 40-year low of around 164 yen to the dollar last week, trading at approximately 156.70 yen on Monday. Wall Street estimates suggest the scale of last week's intervention exceeded $500 billion.
Reuters reported that a "to-do" list was spotted on Treasury Secretary Scott Bessent's desk during a cabinet meeting on Friday, which contained only one item: "Buy yen 50-100 billion." The Financial Times, citing sources, reported on Friday that the New York Federal Reserve intervened by selling euros (EURUSD) to buy yen. From the U.S. perspective, the issue is that Japan's usual method of boosting its currency involves selling off a portion of its roughly $1.1 trillion U.S. Treasury holdings, which is not favorable when long-term bond yields (BX:TMUBMUSD30Y) are near a 20-year high.
Some commentators argue that the intervention's effect will be limited. Wall Street strategists say that for a sustained and significant strengthening of the yen, the Bank of Japan and the Japanese government need to make actual policy adjustments, including accepting higher domestic interest rates. Robin Brooks, a senior fellow at the Brookings Institution, posted on X on Monday, "The yen is falling not because evil speculators have ganged up on Japan. It's because bond yields are well below where they should be."
Interest rate differentials are typically a key driver of exchange rates, as capital is attracted to higher returns. Japan's policy rate is just 1%, while the U.S. federal funds rate target is 3.50-3.75%. Some foreign exchange strategists believe that raising interest rates would be more constructive for Japan than intervention. Last Friday, the Bank of Japan chose to keep its rate unchanged. Chris Turner, an economist at ING, told clients last week, "Firm commentary could increase the probability of a 25-basis-point rate hike at the next meeting on September 18." Turner pointed to a core issue: Japan's consumer price index is approaching 2%, while the policy rate is only half that level.
Louis Gave, CEO of Gavekal, largely agreed with Turner's view in a note to clients on Monday. He argued, "Unless the Fed cuts rates or the BOJ begins to hike, it is impossible to have a meaningful appreciation of the yen," noting that, like all North Asian currencies, the yen is "deeply undervalued." This conclusion aligns with a July report from Deutsche Bank and one of the findings from the latest edition of the Economist's Big Mac Index. Japan has the largest current account surplus in the G7, which theoretically should support its currency.
The reaction in the foreign exchange market appears somewhat subdued, especially considering the intervention took place during a typically quiet summer trading period. Even after this significant rally, the yen (USDJPY) has only returned to its May trading levels, is roughly flat against the dollar (DXY) for the year, and represents a much more modest move compared to the 12% surge in 2024, when the BOJ pushed the rate from 161 to 141 over a weekend. The action did, however, push the broader U.S. dollar index DXY below 100 for the first time since June.
The timing is also notable, occurring almost exactly two years after a weak U.S. jobs report and a BOJ rate hike triggered a severe unwinding of yen carry trades, causing a brief global market shock. Before the joint intervention last week, Treasury Secretary Scott Bessent and Japanese Finance Minister Satsuki Katayama had tried to boost the yen through verbal intervention alone, but that strategy failed. Japan is the G7 country with the largest current account surplus, which should theoretically support its currency. The dynamics of the yen carry trade—a strategy where investors short low-yielding yen assets to buy higher-yielding assets elsewhere—have weighed on the yen for most of the past 15 years. This intervention marks the first time the U.S. and Japan have jointly acted to boost the yen since the 1998 Asian financial crisis.
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