US-Japan Intervention Fails to Stem Yen's Decline Amid Debt Crisis Concerns

Japan intervened in the foreign exchange market for the third time this year to prop up the Yen, with the US joining forces in a move that's sparking more questions than answers. The size of the intervention is unknown, but it's likely to be massive and may have even surpassed the record-breaking April effort.

The participation of the US adds a new twist to the equation, as it sold Euros to buy Yen, which undercuts the efficacy of its involvement in the market. FX intervention is essentially a confidence game, and giving markets reasons to ask questions only undermines the effort's potential impact.

Despite previous interventions this year, including a huge one on April 29 that failed to stem the Yen's decline, the currency has already begun to bounce back after this latest episode. However, as author Robin J Brooks points out, 'the half-life of intervention looks like it's falling fast.'

Brooks also disputes Treasury Secretary Bessent's claim that the Yen is undervalued, arguing that artificially capping government bond yields only transfers fiscal stress from the bond market to the currency. With Japan's high public debt preventing the country from allowing yields to rise freely, the Yen's fall is more a symptom of a debt crisis than traditional currency dynamics.

In fact, Brooks estimates that if the Bank of Japan stopped buying bonds, the 30-year yield would be at least 300 basis points higher, putting Japan into a debt crisis. For now, speculative Yen shorts had grown very stretched ahead of this week's intervention, but it's not a reason to expect a sustained rebound in the currency.