The United States, in coordination with Japan, conducted a currency intervention to support the yen, which has been weakening for several years. This decline in the Japanese currency is raising concerns not only in Tokyo but also in Washington due to its effects on trade and financial markets.
One of the primary reasons for the yen’s weakness is that the Bank of Japan has maintained interest rates significantly lower than those in other major economies for decades to stimulate stagnant economic growth. This situation encourages the carry trade strategy, where investors borrow inexpensive yen to invest in dollar-denominated assets, particularly US stocks. Consequently, the supply of yen in the market increases, exerting downward pressure on its exchange rate. Additionally, large Japanese companies that invest abroad further weaken the currency by converting yen into foreign currency.
The exchange rate of any currency is determined by the balance of supply and demand. When the yen is actively sold, its value decreases. This is why central banks can support the currency by purchasing it on the market to boost demand.
Why a weak yen is important to the US
In the short term, additional pressure on the yen arises from concerns regarding the economic policy of Prime Minister Sanae Takaichi. Specifically, her proposal to reduce the value-added tax (VAT) on food and beverages from 8% to 1% has raised doubts in financial markets about the stability of public finances.
US President Donald Trump described the currency intervention as «a sign of friendship»
, but Washington has its own interests at stake. A weak yen makes Japanese goods cheaper for American consumers, increasing competitive pressure on US manufacturers. Former Deputy Director of the International Monetary Fund Hung Tran noted in an article for the Atlantic Council that a weak yen is likely to remain a persistent source of tension in economic relations between the US and Japan.
Moreover, Washington is concerned that a further decline in the yen could compel Japan to sell US Treasury bonds to support its currency. As Japan is the largest foreign holder of US government debt, a significant sale of such securities could raise borrowing costs for the US government.
Effectiveness of the intervention and prospects
Following the joint intervention by the US and Japan, the yen strengthened to approximately 157 yen per dollar and subsequently improved slightly. US Treasury Secretary Scott Bessent and his Japanese counterpart Satsuki Katayama have indicated their readiness to re-enter the currency market if necessary.
However, analysts believe that the underlying factors contributing to the yen’s weakness remain unchanged. «Even if the yen continues to strengthen in the short term, we believe that long-term pressure on its exchange rate will persist»
, stated Barclays. According to experts at ING, to reduce the scale of carry trade operations, interest rates in the US and Japan need to gradually converge. This would require an increase in rates by the Bank of Japan, which could negatively impact economic growth rates.
Last week, the governments of Japan and the US instructed their central banks to purchase tens of billions of dollars worth of yen, paying in dollars and euros. According to ING, the total volume of the operation was about 80 billion dollars, with most of the funds provided by the Bank of Japan. Documents from US Treasury Secretary Scott Bessent, obtained by Reuters, also indicated plans to purchase yen worth between 5 and 10 billion dollars.
Last week, 1 dollar was exchanged for 164 yen, marking the weakest exchange rate for the Japanese currency in nearly 40 years. The yen’s decline makes imports more expensive, which Japanese consumers are particularly feeling due to rising prices for energy and other goods.
Source: de Volkskrant
