First US-Japan yen intervention in 30 years fails to stabilise currency
A combined $55 billion-plus effort to prop up the yen has already lost momentum, exposing structural weaknesses in Japan's finances and raising questions about the stability of trades built on cheap yen borrowing.
The first coordinated U.S.-Japan currency intervention in three decades has largely failed to hold. Treasury Secretary Scott Bessent's notepad indicated the U.S. purchased $5 billion to $10 billion worth of yen, while Japan's own operation exceeded $50 billion. The yen initially jumped to roughly 157 per dollar from nearly 164, but by Friday it had slipped back to around 159.
The retreat is significant because it occurred despite cooler-than-expected U.S. inflation data that reduced the likelihood of a near-term Federal Reserve rate hike. Under normal circumstances, narrowing rate differentials between the two countries should support the yen. That it did not suggests forces beyond short-term rate expectations are driving the currency lower.
"This should be a setting where the Yen rallies versus the Dollar, because US rates are falling relative to Japanese ones, but that didn't happen. The Yen continued to fall, which is a really worrying sign," wrote Robin Brooks, senior fellow at the Brookings Institution.
Questions over intervention mechanics
The structure of the operation itself raised eyebrows. The U.S. sold euros rather than dollars to acquire yen, while Japan borrowed against its Treasury holdings instead of selling them outright. Both choices signalled reluctance to disturb dollar liquidity or the U.S. debt market directly.
Japan holds more than $1 trillion in U.S. Treasuries, making it the largest foreign holder of American government debt. Any meaningful drawdown of that reserve would push Treasury yields higher and compound U.S. borrowing costs at a time when fiscal stimulus is already expected to widen Japan's own deficit against a debt load exceeding 200% of GDP.
Carry trade under scrutiny
The yen's persistent weakness has sharpened attention on the carry trade, in which investors borrow cheaply in yen to fund positions in higher-yielding assets globally. A disorderly unwinding of those positions could transmit stress across asset classes.
"Now traders are watching the 'yen carry trade,' where cheap yen borrowing funds bets on higher-yielding assets worldwide, and wondering if it's about to blow up," wrote Ed Yardeni. "The financial system right now looks like a giant Jenga tower with the yen as a load-bearing piece."
Yardeni cautioned that decades of reliance on Asian central banks to absorb U.S. debt are catching up with Washington. "Each Jenga piece gets harder to pull without something toppling," he added, though he noted that Asian economies are in stronger shape than during the 1998 regional crisis.
Calls for a BoJ policy overhaul
Brooks argues that intervention is ultimately futile and merely creates an illusion of stability. He called for a "profound shift" in Bank of Japan policy, going well beyond incremental rate increases.
In his view, long-term Japanese government bond yields must rise to narrow the gap with U.S. yields that has been pressuring the yen. "BoJ buying of government bonds needs to be scaled back so that this can happen," Brooks wrote. "That's the only thing that will strengthen the Yen."
Until such a shift materialises, the market's verdict on last week's intervention appears clear: the symptoms were treated, the disease was not.
