Yen Intervention: A Band-Aid Solution or Temporary Reprieve?

The Bank of Japan and the US Treasury recently intervened in currency markets to prop up the yen, which had crashed through the 162 yen to the dollar level. This intervention was unprecedented since the 1998 Asian financial crisis.

The BoJ spent an estimated $US87 billion and the US Treasury up to $US10 billion to buy yen, driving the exchange rate up to a peak of 155.21 yen to the dollar. However, the exchange rate has slipped back to just over 157.7 after hitting 158.40 on Friday.

The intervention was not motivated by friendship with Japan but rather because a weaker yen would increase the risk that Japanese capital invested in US Treasury bonds could flow back to Japan, putting upward pressure on US bond yields and administration's interest costs, which are already above $US1 trillion a year.