US Treasury Secretary Scott Bessent has defended the Treasury Department's unusual move last month to support the Japanese yen, arguing that extreme and disorderly volatility in the yen market could force investors to unwind related positions, roil global financial markets, and ultimately push up US Treasury yields along with borrowing costs for American households and businesses. Japan is one of the largest foreign holders of US Treasuries, he noted, making stability in the yen market directly relevant to US financial conditions. This intervention marked the first time the US has bought yen through foreign exchange market operations since 1998.
In an August 27th letter to Democratic Senator Elizabeth Warren, which Bessent released on social media platform X on Friday, the Secretary explained that a disorderly yen market could trigger forced liquidations, disrupting global markets and raising borrowing costs for American families and companies. Market observers have previously linked Bessent's extraordinary foreign exchange intervention to an effort to prevent further increases in US Treasury yields. Given Japan's position as the largest overseas holder of US government debt, extreme yen fluctuations could prompt Japanese investors and global carry trade participants to rebalance their portfolios, potentially impacting the vast US Treasury market.
Bessent did not disclose the specific amount of funds used during the Treasury's late-July intervention but stated that it utilized existing foreign currency assets from the Exchange Stabilization Fund (ESF) to purchase yen. He revealed earlier this month that the operation involved euro-denominated assets. Meanwhile, Japan's intervention efforts have been significantly larger, with government data on Friday showing a record $96.4 billion spent in the foreign exchange market over the past month to support the currency.
The direct US participation in supporting the yen is particularly noteworthy as it represents the first such action since 1998. Senator Warren had requested that Bessent explain the analysis and legal basis for using the ESF in this intervention. Bessent responded that the Treasury fully complied with ESF-related laws, which authorize the Secretary, with presidential approval, to maintain orderly exchange arrangements through foreign exchange transactions. Addressing concerns about potential credit risk exposure to Japan, Bessent clarified that the operation was not a loan to Japan. "No credit was extended to Japan," he stated. "Japan owes the US Treasury nothing. There is, therefore, no risk that Japan will fail to repay a debt that does not exist."
The Treasury's operation essentially used foreign currency assets held by the ESF to buy yen in the market, rather than providing financing to the Japanese government. This explanation was a key part of Bessent's response to Warren's inquiries. Despite the joint actions by the US and Japan, the yen has given back some of its post-intervention gains. On Friday, the dollar again breached the 160 yen level, with the yen falling past that mark for the first time since the intervention day in late July. This indicates that market forces pushing the yen weaker have not fully dissipated, despite record Japanese intervention and rare US participation. For the US, renewed yen weakness is particularly concerning as any sharp volatility could reignite carry trade unwinds and shifts in Japanese investor allocations, transmitting further pressure to the US Treasury market.
The high level of attention from Wall Street on this intervention stems from Bessent's recent more proactive approach to influencing the US Treasury market. Market participants have believed that stabilizing the yen could also be an indirect method of stabilizing the Treasury market. As Japan is the world's largest overseas holder of US Treasuries, changes in its domestic interest rates, exchange rates, and capital flows can all potentially affect demand for US debt. If rapid yen depreciation prompts Japanese investors to adjust their foreign bond positions, or forces global investors to unwind yen-funded carry trades, it could create selling pressure in Treasuries, pushing yields higher. Bessent's explicit linking of yen market volatility with US borrowing costs in his formal response to Warren further substantiates market assumptions that the Treasury's rare intervention was not solely a currency policy issue, but also included considerations of maintaining stability in the US Treasury market and preventing further increases in US financing costs. However, questions remain about whether large-scale US-Japan intervention can durably reverse the yen's trajectory. With the yen falling back above 160 per dollar on Friday, market attention will focus on whether the Treasury might act again should the currency experience renewed disorderly swings.
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