US joins Japan in yen intervention for first time since 1998

The US has joined Japan to intervene in currency markets for the first time since 1998, aiming to reverse the yen's historic slide. The coordinated effort, led by Treasury Secretary Scott Bessent, saw direct yen purchases after the currency neared 1986 lows. The yen strengthened to 157.40 per dollar, but its weakness, driven by a large US-Japan interest rate gap, continues to fuel Japanese inflation.

Yen intervention coordination

• ▪A notepad in front of Bessent at a cabinet meeting showed a "To Do" list item to "Buy Japanese Yen (JPY) $5-10 bil."
• ▪US Treasury Secretary Scott Bessent stated in a Fox Business interview that the yen is "very undervalued" and "excess volatility" isn’t healthy
• ▪The coordinated effort was led by US Treasury Secretary Scott Bessent and Japanese Finance Minister Satsuki Katayama
• ▪The US joined Japan in a currency market intervention to support the yen for the first time since 1998

Market intervention mechanics

• ▪The Federal Reserve Bank of New York sold euros to buy yen on behalf of the US Treasury Department
• ▪Following the intervention, the yen strengthened to 157.40 to the dollar on Friday, its strongest level since early May
• ▪The intervention involved direct yen purchases, with Japanese authorities buying yen and selling dollars on Friday
• ▪On Thursday, Japan spent an estimated ¥8.45 trillion ($52.8 billion) in what was likely its largest-ever single-day intervention

Yen weakness drivers

• ▪Prior to the intervention, the yen was approaching its weakest levels against the dollar since 1986
• ▪The yen's multi-year slide has stoked inflation in Japan by increasing import costs for businesses and consumers
• ▪The yen's weakness is driven by rising oil prices, Japan's budget deficits, and a large interest-rate gap with the US

BOJ monetary policy stance

• ▪The Bank of Japan (BOJ) recently voted 8-1 to keep its interest rate unchanged, having raised it to 1% in June
• ▪Some strategists believe the intervention's impact may be short-lived without changes to the interest rate differential
• ▪Japan's 1% interest rate is well below the 3.75% upper bound for the US policy rate, creating a significant rate gap

US-Japan strategic interests

• ▪If Japan acts alone to defend the yen, it may have to sell its US Treasury holdings, which would negatively impact US borrowing costs
• ▪The yen's depreciation gives Japan a trade advantage over the US, which could create political friction with President Donald Trump