US and Japan Unite to Recalibrate Yen Strength
Japan's Ministry of Finance has been engaging in a joint intervention with the US Treasury to strengthen the yen, marking a significant moment in currency markets. The intervention, which was first conducted in early August, saw the two nations working together for the first time since 2011, and the first time the US Treasury had bought yen in concert with Tokyo's Ministry of Finance since 1998.
The joint action has already had a meaningful impact, with the yen hovering around 158 per dollar, compared to its peak near 164 in late July. However, this is seen as a defensive measure, aimed at halting the yen's weakness rather than driving down the dollar-yen rate significantly.
Stephen Jen, CEO and co-CIO of Eurizon SLJ asset management, notes that for Japan, the status quo is unsustainable, and the risk of an excessively weak yen outweighs potential hazards associated with government efforts to support the currency. This includes triggering unwinding and repatriation of foreign capital, but Jen believes this risk may be worth taking.
The joint intervention has also raised questions about the US's motivations for participating in the effort. Treasury Secretary Scott Bessent indicated that financial stability concerns drove the joint action, but some analysts suspect a desire to strengthen America's manufacturing competitiveness and boost U.S. jobs and national security may have played a role as well.
Jen suggests that the US could engineer a weaker dollar without undermining world holdings of US dollar assets by implementing 'mini-lurches' that surprise the market. This would involve a series of small, targeted interventions aimed at deflating the value of the dollar over time without creating expectations of further depreciation.