US Treasury and Japan Join Forces to Support Yen

In an unusual move, the US Treasury joined Japan's Ministry of Finance in a yen-support intervention for the first time in the Scott Bessent era. The operation was strange in almost every mechanical detail: the US sold euros rather than dollars, and Japan drew on the Federal Reserve's Foreign and International Monetary Authority (FIMA) repo facility.

The yen had traded through 160 for the first time in this cycle, but firmed back to roughly 155-156 after the intervention. Brad Setser, a former US Treasury official, argued that the yen had clearly overshot any fundamental fair value and that the intervention has a real chance of holding if, and only if, the Bank of Japan raises rates in September.

Setser also pointed out that Japan's fiscal situation is substantially better than the rhetoric around it suggests. He noted that the Japanese government is the single largest unhedged foreign investor in its own economy, and until it starts repatriating the enormous capital gains its foreign assets have accumulated, no intervention fully resolves the flow imbalance.