US-Japan moves to bolster the Yen set a precedent for currency interventions

Last week’s surprise announcement that the U.S. Treasury Department would assist Japan in propping up the yen has raised questions about what motivated it and what the policy implications are. Following the announcement, the yen surged from a 40-year low of 163 yen per dollar to 155 yen per dollar, but it has since surrendered half of its gains.  

Japan’s motive in intervening is the yen has dropped to its weakest level on a real trade-weighted basis in the flexible exchange rate era that began in the early 1970s. The yen has also depreciated against the U.S. dollar in the past two years, even though U.S.-Japan interest rate differentials have narrowed. Meanwhile, the Japanese authorities face the prospect that the surge in oil prices and a weak yen will boost import prices and add to inflation pressures. 

There is widespread agreement that for the joint intervention to stabilize the yen it would have to be sufficiently large to alter expectations of currency traders. Even then, the Bank of Japan could be compelled to tighten monetary policy, as money market rates at 0.93 percent are below Japan’s consumer price inflation rate at 1.5 percent.  

Treasury Secretary Scott Bessent’s motive to participate is to lessen the need for Japanese authorities to sell Treasuries to fund their currency market intervention. As of May, Japan’s official holdings of Treasuries stood at $1.1 trillion, making it the largest official holder of U.S. debt.   

The Treasury previously funded currency market interventions through its Exchange Stabilization Fund that holds $20 billion in........

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