Japan-USD Intervention Hints at Global Debt Doom Loop

The Japanese yen hit its lowest level against the US dollar in 40 years in late July, reaching 164 to one USD. The differential between US and Japanese interest rates was cited as a reason by some analysts, but the Federal Reserve has kept interest rates unchanged while Japan's sales of US bonds have increased US long-term bond yields.

On July 31, US Treasury Secretary Scott Bessent announced coordinated US-Japan currency intervention for the first time since 1998 using the Fed’s Foreign and International Monetary Authorities (FIMA) Repo Facility, capped at $60 billion. As a result of this joint intervention, the yen bounced back to 155 and had been trading around 157 per dollar by last week.

The Japanese government and Bank of Japan conduct yen buying interventions by selling US dollar bonds from their holdings, which increases US Treasury bond yields due to the lower bond price, higher yield effect. This in turn puts upward pressure on all US interest rates, as long-term mortgage rates are benchmarked on long-term Treasury bond rates.

The world's two largest economies face a converging crisis - interest rates rising faster than the economies that must service their huge government debt. For the US, with government debt at nearly 100% of GDP and an average debt maturity of just six years, one third of the entire Treasury stock resets to new, higher yields every two years.