US efforts to prop up the yen risk doing more harm than good
Has the interminable decline in the yen finally run its course? Since the beginning of 2022, Japan’s currency has fallen a staggering 36 per cent against the US dollar. Despite the resolve of the Bank of Japan (BOJ) to keep raising interest rates, the surge in Japanese bond yields over the past year, and frequent interventions by the government to support the currency, the yen has continued to weaken. On July 23, it dropped to its weakest level against the greenback since 1986, sliding past the...
Reversing the yen’s long-term decline ultimately rests on Japan’s ability to take its real interest rates out of negative territory, without triggering market panic
The surprise coordinated intervention has caused the yen to strengthen to 157 per dollar, its strongest level since May 12. The fact that the US was directly involved indicates a stronger commitment to shoring up the currency. In a report on August 2, Citigroup said “coordinated intervention may be a turning point” for the yen. HSBC, in a report on August 3, said “joint intervention will likely buy more time than earlier solo intervention”.
Yet no sooner did the joint operation occur than investors began to question the rationale for US participation, especially given US Treasury Secretary Scott Bessent’s unusually assertive approach to shaping Japanese economic policy, and whether it would help or hinder efforts to stabilise Japan’s currency and bond markets.
This explains why Bessent wants Japan’s government to make use of the so-called Foreign and International Monetary Authorities Repo Facility, a Federal Reserve liquidity tool that allows central banks to use their Treasury holdings as collateral to access dollars. This would allow Japan to intervene in the currency markets without having to sell Treasuries when trading dollars for yen.
