US Steps In To Support Struggling Japanese Yen

The Japanese yen has been on a steady decline over the past five years, losing 30% of its value against the US dollar and nearly as much against the pound. The currency recently hit a 40-year low against the greenback. To support the yen, Japan's Ministry of Finance and the US Treasury jointly intervened in currency markets.

Japan is thought to have sold $59 billion to buy yen, with Washington staging a smaller intervention, its first in Japan since 2011, in support. This move sent the Japanese yen up 3.5% against the US dollar, a significant rise in foreign-exchange terms that reversed months of depreciation.

US Treasury secretary Scott Bessent has shown markets there is “a new sheriff in town”, according to Katie Martin in the Financial Times. The real mystery is why Washington is getting involved at all. One explanation is simply that Donald Trump likes Japan, telling reporters “Japan's been very good to us, with the exception, of course, of Pearl Harbor”.

Self-interest may be motivating Bessent as well. Japan's “massive sales” of dollar assets (mainly US Treasuries) are raising US borrowing costs at a time when government yields are already under pressure. His solution? “Stand behind Japan like a scary big brother” to “scare off the yen sellers.”

The operation is likely to halt, at least temporarily, a “disruptive further depreciation” of the yen, says Brad Setser of the Council on Foreign Relations. A weak yen tends to pressure other Asian currencies lower. By making the region's exports cheaper, weak Asian currencies cut against the White House's desire for US re-industrialisation.

Japan cannot afford to raise interest rates because of its mammoth government debt, which is equivalent to 248% of GDP. But without the support of rate hikes, this currency intervention will ultimately “fail like all previous ones”, according to Robin Brooks on Substack.