Yen Intervention Falls Short as Japan and US Face Economic Endgame

The recent intervention by the Bank of Japan (BoJ) and the US Federal Reserve (Fed) to support the yen has raised questions about its effectiveness. The BoJ and Fed bought around $87 billion worth of yen, citing market stability as their goal.

However, experts argue that this intervention may not be enough to stem the tide of Japan's economic woes. The country faces rising inflation, exacerbated by high energy prices, which are affected by a weaker yen. Furthermore, a weak yen could lead to divestment from foreign investors who own around 32 percent of Japanese equities.

The US also has a vested interest in stabilizing the yen, as a weaker currency reduces export competitiveness and increases upward pressure on the dollar. Japanese policymakers are wary of a repeat of the August 2024 unwind of the yen carry trade when Japan's Nikkei 225 index fell 12.4 percent, triggering declines in asset prices globally.

Currency intervention rarely works, and its effects are temporary. The episode highlights deep structural problems in both economies, which can be traced back to the 'bubble' economy that resulted from the Plaza Accord. Japan's policymakers responded with repeated fiscal stimulus, low and then negative interest rates, multiple rounds of quantitative easing and liquidity infusions.

The measures did not restart economic activity, which averages an anaemic 1 percent, create inflation to boost asset values and reduce real debt levels. It created chronic budget deficits, the highest government debt in the Organisation for Economic Co-operation and Development, 250 percent of GDP, and an over-burdened central bank whose government bond holding peaked at 54 percent in 2023.

Without policy changes and steely political resolve to address these core issues, a crisis appears inevitable. It will take the form of an unprecedented financial crash and the failure of the currency system, which will trigger a collapse of economic activity, societal and political breakdown.