US and Japan Form Informal Currency Alliance

The United States and Japan have formed an informal 'currency alliance' that links their foreign-exchange policies to their broader economic and national-security relationship, according to Citi strategists.

Citi notes that this arrangement is not a monetary union but rather policy coordination. It may also support Japan's $550 billion US investment program. The bank does not believe that Treasury Secretary Scott Bessent is implementing the proposed 'Mar-a-Lago accord' aimed at reshaping the international monetary system.

The intervention, which included dollar-selling through the Federal Reserve's Foreign and International Monetary Authorities facility, was described by Japan's Vice Finance Minister for International Affairs Atsushi Mimura as the culmination of that alliance. Citi believes that Bessent is concerned about prolonged yen weakness recreating conditions seen before the Asian currency crisis in the late 1990s.

The move may send a warning to Japanese Prime Minister Sanae Takaichi, whose reflationary policies could place renewed downward pressure on the yen. Citi views Washington's support of the intervention as a 'signal of friendship' and believes that Washington wants Tokyo to moderate its stance.