US and Japan Unite Against Yen Weakness

The US and Japan have joined forces to stabilize the yen, which has been battered by speculative bets. This rare alignment of interests in Washington and Tokyo follows months of preparation by the two nations.

A joint effort between the two countries is aimed at combating market headwinds that have pushed the yen to a four-decade low. A weak yen creates cost-of-living headaches for successive Japanese governments, including Prime Minister Sanae Takaichi's administration. For the US, a weak yen blunts its trade advantage from President Donald Trump's flagship tariffs.

The need for action heightened in July when concern over Takaichi's expansionary fiscal and monetary stance drove the yen to recent lows, pushing up import prices and hurting the administration's approval ratings. The US Treasury Secretary Scott Bessent has given bureaucrats in Tokyo a new tool in their fight against a weak yen with his verbal support for a stronger yen.

The Bank of Japan (BOJ) has raised interest rates to a 31-year high of 1 per cent, but the move failed to give a lasting boost to the sagging currency. The BOJ's communication on its future rate plans was its most hawkish to date and nodded to a line in the US Treasury's currency report that 'monetary normalisation would help reduce excessive exchange rate volatility.'

The US Treasury has informed banks that it might intervene in the yen market and that they should 'stand ready for future action'. Bessent has stressed his support for higher BOJ rates, saying he would meet BOJ governor Kazuo Ueda at a US-hosted Group of 20 finance leaders' meeting in end-August. Markets now see the BOJ's September meeting as live, with many predicting a rate hike.