The joint currency intervention by the United States and Japan, the first of its kind in thirty years, was expected to stabilize the rapidly depreciating yen. However, this massive market operation only provided a brief boost and failed to truly calm fears in the foreign exchange market.
Intervention can only ease the superficial symptoms of the yen's weakness, but it cannot resolve deep-seated issues such as high debt levels and lagging monetary policy. The unusual nature of the intervention also reveals US concerns about its own debt, and many market analysts warn that any sharp volatility in the yen, a key funding currency for global carry trades, could destabilize the entire global financial system.
Massive Intervention Has a Short-Lived Effect, Providing No Long-Term Solution
According to records related to US Treasury Secretary Scott Bessent, the US deployed between $5 billion and $10 billion to buy yen, while Japan's intervention funds exceeded $50 billion. Following the intervention, the USD/JPY exchange rate rapidly fell from near 164 to around 157. However, the positive effect quickly dissipated, and last Friday (August 14), the rate rose again to oscillate around 159.
At its core, the yen's weakness stems from multiple structural challenges. Japan's government debt has exceeded 200% of GDP, and fiscal stimulus plans will further expand the budget deficit. Facing an inflationary environment, the Bank of Japan has remained conservative in its rate-hiking pace. These issues cannot be resolved with short-term currency intervention. Even as US inflation data cooled and market expectations for a Federal Reserve rate cut were lowered, the yen failed to hold onto the gains from the intervention, demonstrating the powerful underlying pressure from the fundamentals.
Intervention Approach Hides Risks, Triggers Warnings for Global Financial System
The method of this intervention has sparked widespread market discussion. The US chose to sell euros to buy yen, rather than using dollars. Japan financed its intervention by using its holdings of US Treasuries as collateral for borrowing, rather than selling them directly. Wall Street veteran analyst Ed Yardeni stated in a research note last Tuesday that traders are currently highly alert to the risks of yen carry trades. The market relies on borrowing yen at low cost to invest in higher-yielding global assets, making the entire financial system like a giant Jenga tower, with the yen as a critical load-bearing block.
Japan holds over $1 trillion in US Treasuries, making it the largest foreign holder of US debt. If Japan chose to sell its US Treasuries directly, it would push US yields higher, increasing the cost of US debt service. Yardeni noted that the long-held expectation of Asian central banks continuing to buy US Treasuries is changing, and any adjustment in variables could trigger a chain reaction. Compared to the 1998 Asian financial crisis, Asian economies are now more resilient, but potential risks cannot be ignored.
Robin Brooks, a senior fellow at the Brookings Institution, stated that a falling US relative interest rate environment should have been positive for the yen, yet the yen remains weak. He sees this as a highly significant warning signal. He has long warned that the yen's persistent weakness is brewing a debt crisis, and simple foreign exchange intervention will ultimately fail, only creating the illusion of temporary stability. He added that to truly strengthen the yen, the Bank of Japan must make deep policy adjustments, reduce its bond purchases, and push up Japanese long-term government bond yields to narrow the yield gap with US Treasuries.
In conclusion, the joint US-Japan intervention only provided a short-term rebound for the yen and could not reverse its structurally weak position. The special operations used in the intervention reflect deep-seated US concerns about the stability of the Treasury market. As the yen carry trade is a crucial pillar of global liquidity, its stability impacts global asset prices. The subsequent policy direction of the Bank of Japan will be the key factor determining the yen's trajectory.
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