The first U.S.-Japan joint intervention in three decades aimed at boosting the yen has come and gone without doing much to ease anxiety in currency markets.
Treasury Secretary Scott Bessent’s notepad suggested the U.S. bought $5 billion-$10 billion worth of yen, while Japan’s move topped $50 billion. The exchange rate initially strengthened to about 157 yen per dollar from nearly 164, but has since given back some gains and hovered around 159 on Friday.
To be sure, efforts to prop up the yen were seen as short-term measures to address the symptoms rather than the root causes of the currency’s weakness. Those include Japan’s massive debt that exceeds 200% of GDP, fiscal stimulus that’s expected to worsen the deficit, and a central bank that’s been slow to raise rates in the face of high inflation.
But given that the yen’s recent instability was enough to trigger the U.S.-Japan intervention, a key underpinning of global financial markets appears riskier.
“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,” Wall Street veteran Ed Yardeni wrote in a note on Tuesday. “The financial system right now looks like a giant Jenga tower with the yen as a load-bearing piece.”
The way the U.S. and Japan intervened had already raised other concerns, especially the fact that the U.S. sold euros, not dollars, to buy yen and that Japan borrowed against its Treasury holdings rather than selling them.
The tactics called into question the dollar’s dominance and revealed the Trump administration’s underlying fears of how a spiraling yen could worsen the U.S. debt outlook.
With a stockpile of more than $1 trillion in Treasuries, Japan is the largest foreign holder of U.S. debt. So any drawdown of that reserve would send Treasury yields higher and add further to U.S. debt costs.
Other countries in Asia could sell Treasuries too. But Yardeni pointed out they are in better shape than they were during the 1998 Asian financial crisis, when currencies across the region crashed. Still, risks remain.
“Team Bessent isn’t exactly hat in hand,” he added. “But decades of assuming that Asia’s central banks dutifully would keep buying U.S. debt are catching up with Washington. Each Jenga piece gets harder to pull without something toppling.”
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The yen’s post-intervention pullback was also notable since it happened despite cooler-than-expected U.S. inflation data that lowered the odds of an imminent rate hike from the Federal Reserve.
Previously, the Bank of Japan’s reluctance to raise its own rates coupled with fears the Fed would hike as soon as next month had been driving the yen’s recent slump.
But relatively tame readings on U.S. consumer and producer prices this past week offered no reprieve for the yen.
“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, in a Substack post titled “The Yen is in Deep Trouble.”
He has been sounding the alarm on the yen for a while, warning its extended slide is actually a sign of a simmering debt crisis. Eventually, markets will ignore intervention, which is doomed to fail and merely creates the illusion of stability, Brooks has said.
On Friday, he called for a “profound shift” in the Bank of Japan’s policy, going well beyond incremental increases to its benchmark rate.
Instead, long-term yields on Japanese government bonds must rise to narrow the gap versus U.S. yields that’s been sending the yen lower.
“BoJ buying of government bonds needs to be scaled back so that this can happen,” Brooks added. “That’s the only thing that will strengthen the Yen.”
