Bessent Warns Yen Volatility Risks Global Market Destabilization

US Treasury Secretary Scott Bessent has sounded a warning about potential risks of yen volatility spilling over into global markets. In an Aug. 27 letter to Democratic Senator Elizabeth Warren, Bessent outlined concerns that disorderly currency fluctuations could lead to forced position unwinds and destabilize global financial markets.

According to the letter, such an event would have a direct impact on American households and businesses by pushing up borrowing costs. The warning comes as the yen continues to experience downward pressure despite market expectations of near-term rate hikes by the Bank of Japan.

The US Treasury has defended its decision to partner with Tokyo in a joint currency intervention last month, arguing that it helped to counter disorderly declines in the Japanese currency. The Treasury used the Exchange Stabilization Fund (ESF) to exchange foreign-currency assets for yen, citing a historical precedent set by previous Treasury stabilization efforts.

The ESF has been used previously to support Argentina's peso market and establish a $20 billion currency swap facility to stabilize the currency. Although the joint intervention initially helped to rally the yen from a 40-year low near 140 per dollar up to 155.20, it has since surrendered those gains and drifted back toward the 160 mark.