Washington and Tokyo have launched a rare coordinated intervention to support the yen after it plunged to multi-decade lows, as policymakers seek to contain currency volatility, inflation risks and potential spillovers into global bond markets.
The United States and Japan have taken the unusual step of jointly intervening in foreign exchange markets to support the Japanese yen after the currency’s prolonged slide pushed it to its weakest levels against the dollar in around four decades.
The coordinated yen-buying operation marks a significant escalation in Tokyo’s efforts to defend its currency and signals that Washington increasingly sees the yen’s weakness as more than just a Japanese problem.
Japan’s Ministry of Finance confirmed the joint intervention with the US Treasury, saying the action was aimed at countering “excessive volatility and disorderly movements” in the yen.
US Treasury Secretary Scott Bessent also backed the move and indicated that Washington could participate in further coordinated action if necessary.
The intervention helped trigger a sharp recovery in the Japanese currency. The yen, which had weakened to around 164 against the US dollar last month, strengthened significantly following the intervention, with traders now watching closely for signs of further action. But what has pushed the yen so low — and why has Washington decided to get involved?
Why has the yen been falling?
At the heart of the yen’s weakness is the large interest-rate gap between Japan and the United States.
More from BusinessThe Bank of Japan’s benchmark interest rate stands at 1 per cent, even after its latest increase in June, while the US Federal Reserve’s benchmark rate remains substantially higher at 3.50 per cent-3.75 per cent. That gap matters for currency markets.
Higher US interest rates make dollar-denominated assets relatively more attractive to global investors. Investors can borrow or raise funds in lower-yielding currencies such as the yen and move money into higher-yielding dollar assets — putting additional downward pressure on the Japanese currency.
Japan’s economic structure has added to the pressure.
The country faces a shrinking working-age population, relatively weak productivity growth and heavy dependence on imported energy and commodities, much of which is priced in US dollars.
A weaker yen consequently makes imports more expensive, adding to inflation and squeezing Japanese households.
Why hasn’t Japan been able to stop the fall?
Tokyo has already tried several measures to stabilise its currency. Japan intervened in currency markets earlier this year by purchasing yen, while the Bank of Japan raised its benchmark interest rate to 1 per cent in June — its highest level since 1995. Neither move produced a lasting turnaround.
That is because currency intervention can influence markets in the short term, but it does not necessarily eliminate the fundamental economic forces pushing a currency lower.
Unless the interest-rate gap between Japan and other major economies narrows significantly, analysts argue that pressure on the yen could persist.
The Bank of Japan has signalled that further monetary tightening could be considered, making the trajectory of Japanese interest rates crucial to whether the yen’s recovery lasts.
Why is the US stepping in?
Washington’s participation makes the latest intervention particularly significant. One concern is the potential impact of Japan’s currency problems on the US Treasury market.
Japan is the world’s largest foreign holder of US government debt. Large-scale unilateral intervention by Tokyo could theoretically require Japan to sell dollar assets, including US Treasuries, to raise dollars that can then be exchanged for yen.
Heavy Treasury selling could put additional upward pressure on US bond yields at a time when Washington is already dealing with elevated long-term borrowing costs.
Japan has indicated that it plans to use the Federal Reserve’s Foreign and International Monetary Authorities, or FIMA, repo facility for future interventions. The facility allows foreign monetary authorities to temporarily exchange US Treasury securities for dollars rather than selling those securities outright.
That could allow Tokyo to access dollar liquidity while limiting disruption to the Treasury market. Washington also has a trade-related reason to care.
US officials have argued that the yen is substantially undervalued. A very weak yen makes Japanese exports cheaper and potentially more competitive internationally, including against American products.
Supporting the yen therefore fits with Washington’s broader economic interest in reducing what it sees as currency-driven trade distortions.
Why is this intervention different?
Coordinated currency intervention involving Washington is rare. The latest operation is the first joint US-Japan action specifically aimed at buying yen since 1998. The two countries were also part of a wider coordinated intervention in 2011, when major economies moved in the opposite direction and sought to weaken the yen following Japan’s devastating earthquake and tsunami.
US participation gives the current intervention considerably greater signalling power. Rather than Tokyo acting alone against currency traders, the world’s largest economy is effectively signalling that it is also prepared to push back against excessive yen weakness.
Both governments have indicated that they are willing to intervene again, potentially making investors more cautious about aggressively betting against the Japanese currency.
Can intervention permanently strengthen the yen?
That remains the bigger question. Coordinated intervention can disrupt speculative positions and produce sharp currency moves, particularly when markets believe authorities are prepared to repeatedly intervene.
But intervention alone may struggle to reverse the yen’s longer-term trajectory.
The currency’s direction will ultimately depend on broader fundamentals — particularly Bank of Japan interest-rate policy, Japanese bond yields, US monetary policy and the gap between returns available in Japan and overseas.
For now, the joint operation has sent markets an unmistakable message: Tokyo is no longer defending the yen alone, and Washington is prepared to help if currency instability threatens wider financial markets.
Whether that is enough to deliver a sustained recovery in the yen will depend less on how many dollars the two governments deploy and more on whether Japan’s underlying monetary and economic conditions begin to change.
