In an unusual and precise move, the United States government joined forces with Japan last week to orchestrate an intervention in the Asian country's foreign exchange market to contain a record fall in theyen – which on Friday threatened to reach its lowest level against the dollar in four decades.
The maneuver was consolidated on the afternoon of Monday, August 3rd, with the yen recovering its exchange rate to around 156 per dollar, rising from a pre-intervention low near 164 per dollar on Friday – the worst rate since 1986.
"Markets are treating this as a currency issue, but it's much more than that," wrote Nigel Green, CEO of the Vere Group financial consultancy, in a note to clients.
"When two of the world's largest economies enter the market together for the first time in over a decade, they are telling investors something about the growing tension in the global financial system, and not just about an exchange rate," he added.
The US involvement in the yen intervention may have been an attempt to allow the Japanese to smooth out fluctuations in their currency without creating further market pressure on US Treasury bonds – whose reserves the Japanese central bank would sell to stabilize the yen.
Concerns about Treasuries are justified: long-term US interest rates have been rising in recent months, with the yield on 30-year Treasury bonds hitting new highs since 2007 in recent days, trading in the 5.23% range on Monday, August 3rd.
US intervention in another country's currency markets is rare. The US last contributed to the strengthening of the yen in 1998, when the global economy was shaken by the Asian financial crisis.
This year, the Trump administration bought Argentine pesos to help President Javier Milei build up dollar foreign exchange reserves as part of a repayment of an IMF loan to Argentina – but the move did not affect American indicators, nor is Japan in the same economic situation as Argentina.
The Japanese government possesses abundant foreign exchange reserves, and the country's economy is growing again after decades of stagnation and falling prices. Even so, the yen has been under pressure due to a combination of investor concerns, including those related to fiscal policy, public debt – the highest among wealthy countries – and rising inflation.
Like other Asian currencies, the yen has also been facing difficulties due to capital flight to the US in search of higher returns from the artificial intelligence boom. The war with Iran has increased pressure on the currencies of Japan and other energy importers.
Since April, Japan has already burned through about US$120 billion of its foreign exchange reserves to support the yen, without managing to prevent further devaluations – in the last few weeks alone, about US$50 billion has been used to stem the bleeding of the yen.
Plenty of reasons
In official statements and declarations on Monday, the 3rd, the American government conveyed the message that the operation was nothing more than an act of assistance to an allied nation.
Speaking to reporters aboard Air Force One, President Donald Trump said that Japan had requested assistance and that the U.S. was happy to fulfill the request.
“They wanted a little help and we’re always here for Japan,” he said. “Japan has been very good to us, with the exception, of course, of Pearl Harbor.”
But it didn't take long for analysts and the American press to reveal the real interests of the US in preventing a sharp fall in the Japanese currency.
A record devaluation of the yen could indirectly affect yields on US Treasury bonds. In practice, the variation in yields on US bonds in the international market due to the Japanese sell-off could impact US monetary policy, causing an increase in interest rates – which are already rising due to fiscal concerns and uncertainties about Federal Reserve policy.
Other reasons led the White House to push for joint action by the two countries. A rapid and disorderly fall in the yen could affect other assets linked to carry trade – a movement in which global investors borrow in yen at low costs and buy assets with more robust yields abroad, taking advantage of Japan's historical context of ultra-low interest rates.
The devaluation of the yen also makes it difficult for Japanese companies to finance a planned $550 billion investment in the US, according to a trade agreement Trump reached with the Japanese last year – a bargain to avoid imposing tariffs on the government of Prime Minister Sanae Takaichi.
Late last week, the Treasury Department indirectly alluded to its involvement in foreign exchange market intervention, with a social media post by Secretary Scott Bessent referring to "a solid relationship and close coordination."
At a press event at Camp David, with photographers present, Bessent had a notepad in front of him with a to-do list that read: "Buy Japanese yen (JPY) worth 5 to 10 billion dollars."
On Monday morning, both governments confirmed the initiative. "Friday's coordinated exchange rate actions countered the yen's disorderly movements," Bessent wrote in X. "We will not hesitate to participate in further joint interventions."
The American press, however, claims that the two governments appear to have used complementary tools. The Federal Reserve of New York, acting on behalf of the Treasury, reportedly sold euros to buy yen. In practice, the US Treasury was acting to strengthen the yen-euro exchange rate.
Apparently, the initiative achieved its goal of strengthening the yen in global currency markets without the Japanese government having to sell US Treasury bonds on a large scale.
According to the Axios website, the Fed's repurchase program – the little-used Foreign and International Monetary Authorities Repurchase Facility – was offered to Japanese authorities as a way to borrow in dollars using Treasury bonds as collateral, instead of selling those bonds directly.
Japan's Treasury Minister Satsuki Katayama confirmed this move by admitting that Japan plans to use a credit line created during the pandemic to obtain dollars from the Federal Reserve, instead of selling its Treasury bond reserves to finance future interventions.
Incidentally, Bessent knows about the yen – the current Treasury Secretary earned about $1 billion betting against the yen in the 1990s, when he worked at Soros Fund Management .
Bessent identified at the time that Japan would not be able to sustain its exchange rate policy in the face of internal economic weaknesses, so he led the strategy of selling yen on a large scale, and when the Japanese government was forced to let the currency depreciate, the fund bought back yen at much cheaper prices, crystallizing the extraordinary profit.
