Japanese authorities confirmed the once-in-a-generation coordinated effort to boost their struggling currency
The U.S. had reasons to step in and help boost the yen besides sending a "signal of friendship" to Japan.
The U.S. Treasury Department and Federal Reserve have joined forces with their Japanese counterparts to stage a historic joint intervention to boost the Japanese yen, according to Japan's Ministry of Finance, which confirmed the move in a statement on Monday.
With everything going on domestically, from a percolating affordability crisis to the ongoing conflict with Iran, some might wonder what might have motivated the U.S. to take such a dramatic action on behalf of an ally.
President Donald Trump said that the U.S. had intervened to buttress the yen as a "signal of friendship." But the decision to take part was hardly an act of generosity, Wall Street strategists told MarketWatch. The U.S. economy and American financial markets stand to benefit from a stable yen, just as Japan does. As Treasury yields on the long end of the curve shot higher last week, the Japanese currency softened to its weakest level against the dollar in four decades. To policymakers in the U.S., this likely set off alarm bells.
Recently, a weakening yen has been paired with another disturbing market dynamic: higher Japanese bond yields. More often than not, rising Japanese yields have had a spillover effect on global markets, pushing yields higher around the world - including in the U.S.
Japan has a reputation as an exporter of investment capital, and higher domestic yields can incentivize private Japanese investors, like pension plans and insurance companies, to seek investments closer to home. And yields on long-dated U.S. Treasurys are already sitting around their highest levels since 2007.
"In the recent past, when you've had episodes of acute yen weakness, it has increasingly been associated with higher Japanese yields, which often spills over into the U.S.," said Steve Englander, head of global G10 FX research and North American strategy, told MarketWatch.
Japanese authorities have intervened to boost the yen a handful of times over the past few years. But these massive purchases of yen in the open market have typically had only an ephemeral impact on the exchange rate, and have put upward pressure on U.S. yields as Japanese holders dumped U.S. assets like Treasurys to help support their currency.
"We'd prefer them not to be selling about $50 billion of Treasurys every time they intervene for little, if any, results," said Eric Wallerstein, chief macro strategist at Clocktower Group.
As a consequence of the intervention, the Japanese currency strengthened almost 5% from last week's forty-year low of -Yen164 to -Yen156.70 on Monday.
What Wall Street is saying
Estimates of the scale of last week's intervention top $50 billion. During a U.S. cabinet meeting on Friday, Reuters snapped a "To Do" list on Bessent's desk notepad that contained a solitary entry: "Buy Japanese yen $5-10 bill."
The Financial Times reported Friday that the Federal Reserve Bank of New York had conducted its intervention by selling euros (EURUSD) to buy the yen, citing sources familiar with the matter. The problem with intervention from the U.S. perspective is that Japan's usual moves to bolster its currency involve lowering some of its enormous $1.1 trillion holdings of U.S. Treasury bonds. With long bond yields BX:TMUBMUSD30Y at a near two-decade high, this is not helpful.
Intervention, according to some commentators can only go so far. For the yen to materially strengthen over time, the BoJ and Japan's government will need to make actual policy changes, including accepting higher domestic interest rates, Wall Street strategists said.
"The yen isn't falling because evil speculators are ganging up on Japan. It's falling because government bond yields are way below where they should be," Robin Brooks, senior fellow at the Brookings Institution, posted on X Monday.
Interest-rate differentials are usually the driver of forex rates because capital is attracted by higher returns. Japan's policy rate is just 1%, while the fed-funds target rate (FF00) is 3.50-3.75%.
More constructive than intervention, according to some forex strategists, would be for the Bank of Japan to increase interest rates. Last Friday, it opted to leave them unchanged. ING economist Chris Turner told clients last week that "firm discussions could potentially see chances of a 25 basis-point hike at the next meeting September 18." Turner highlighted the main problem: Japan's consumer-price index is approaching 2%, and the policy rate is only half that.
Gavekal's chief executive officer, Louis Gave, wrote a note to clients Monday which tended to dovetail with Turner's opinion. He argued that "the yen cannot rise meaningfully unless either the Fed cuts rates, or the Bank of Japan starts to hike," and that like every North Asian currency, the yen is "seriously undervalued." This was also the conclusion of the Mapping the World report by Deutsche Bank in July and one of the findings of the Economist's latest installment of the Big Mac Index.
Japan runs the largest current account surplus in the G-7. In theory, this should support its currency.
The reaction in currency markets seems somewhat underwhelming, especially considering the intervention occurred during thin summer trading. Even after this sharp rally, the yen (USDJPY) is only back to its May trading level, it's still roughly flat on the year against the dollar DXY and compared with the 12% spike, from 161 to 141 engineered by the Bank of Japan on the corresponding weekend in 2024, the move is far more modest.
The maneuver, however, did lower the broader dollar index DXY below 100 for the first time since June. Its timing is also notable, coming almost exactly two years after a weak U.S. labor report and a BoJ rate hike triggered a punishing unwind of the Japanese yen carry trade, which briefly hammered global markets.
Until last week's combined intervention, both Treasury Secretary Scott Bessent and Japanese Finance Minister Satsuki Katayama, had tried to boost the yen merely through verbal encouragement - but that strategy proved unsuccessful.
Japan runs the biggest current account surplus in the G-7 - which should, in theory, be supportive of the currency. The dynamics of the Japanese yen carry trade, a trading strategy in which investors short low-yielding yen assets to buy higher-yielding assets elsewhere, have kept it under pressure for most of the past 15 years.
The intervention marked the first time the U.S. and Japan have moved jointly to boost the yen since the 1998 Asian financial crisis.
-Joseph Adinolfi -Jules Rimmer
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