US and Japan Team Up to Support Yen Amid 40-Year Low
The Japanese yen hit its weakest level in nearly 40 years after falling to around 164 against the US dollar. To counter this, a coordinated intervention between the US and Japan took place last week. The US Treasury sold euros to help support the yen, rather than dollars, as part of the effort.
This move was not aimed at weakening the dollar but rather to strengthen the yen without sending a signal that Washington wanted a weaker dollar. The intervention pushed the yen higher, recovering it to around 155 against the dollar before giving back some gains.
The US intervened in the currency market for two main reasons. Firstly, trade: when the yen weakens, Japanese goods become cheaper in dollar terms, which could undermine the impact of US tariffs on imports. Secondly, financial markets: Japan is a major buyer of US government bonds and if it needs to sell some to support the yen, it could lead to higher US bond yields.
The US Treasury Secretary recently suggested expanding the Fed's FEMA repo facility to give Japan an alternative way to get dollars without having to sell its US Treasuries. However, this intervention does not solve the underlying problem of the interest rate gap between the US and Japan, which continues to attract investors away from yen.