Since the beginning of this year, the exchange rate of the Japanese yen has continued to weaken. In late July, the yen against the U.S. dollar briefly approached the level of JPY 164 per USD. However, at the end of July, the yen exchange rate suddenly rose. Subsequently, market rumors emerged that the Japanese government had intervened in the exchange rate. At the beginning of August, the signals of government intervention became clearer. Unlike previous instances where the Japanese government acted alone, the United States also participated in this intervention, marking a rare and historic occasion where the governments of both the U.S. and Japan have jointly intervened in the yen exchange rate for the first time in nearly 15 years.
Japanese Finance Minister Satsuki Katayama confirmed on August 3 that Japan and the U.S. had jointly intervened in the foreign exchange market, aiming to address the recent sharp fluctuations and chaotic trends of the yen exchange rate. This pushed the yen up to JPY 155, with a single-week gain close to 5%. The scale of this intervention is estimated to exceed USD 50 billion. According to media reports, U.S. President Donald Trump confirmed U.S. participation in the intervention during a cabinet meeting, calling the move a "signal of friendship". On the U.S. side, based on the Bank of Japan (BOJ)'s latest money market data, the Japanese central bank likely deployed USD 53 billion and USD 34 billion, respectively, during its foreign exchange interventions on July 30 and 31, totaling USD 87 billion, equivalent to JPY 11 trillion, to buy yen and support the exchange rate. Some reports indicated that the rise of the yen on August 3 was not driven by government intervention, but rather by market buying after policy intervention was confirmed. In the short term, strong policy intervention indeed exerts an important influence on the market.
However, after experiencing a brief surge, the momentum for the yen to continue rising is insufficient. On August 5, it fell back to around JPY 157. Subsequent market reactions have not matched the scenario following Japan's initial market intervention in 2024, bearing more similarity to the period in May of this year when the Japanese government intervened in the yen alone. In contrast, during the same period in 2024, the BOJ conducted two unilateral interventions costing nearly USD 100 billion, which successfully pushed the yen from JPY 161 to JPY 141, a surge as high as 12%. Compared to this, the recent action cost a considerable amount, but the degree of exchange rate appreciation was noticeably inferior. In April and May of this year, Japan also intervened unilaterally in the foreign exchange market, spending over USD 70 billion, but the result was once again short-lived. After a brief rebound, the yen continued to depreciate beyond JPY 160. As ANBOUND researchers noted previously, the Japanese side's market entry intervention has not changed the depreciation trend of the yen.
If the further depreciation of the yen beyond JPY 160 in the second quarter was driven more by short-term factors such as geopolitical risk fluctuations, then entering the third quarter, the ongoing geopolitical conflict in the Middle East has left this factor unalleviated. Military actions between the U.S. and Iran have caused intermittent disruptions to the Strait of Hormuz, a vital energy artery, causing international oil prices to fluctuate accordingly. For an energy-importing nation like Japan, these developments not only drive up prices and exacerbate inflation, but unstable energy supplies also affect multiple sectors such as industrial production and transportation, constraining Japan's economic stability. Meanwhile, Sanae Takaichi's government persists with expansionary fiscal policies, which further drags down the credit of the yen. Recently, the Takaichi government launched another policy to cut and exempt consumption tax, which is expected to further widen the fiscal deficit. This implies an increased issuance of Japanese government bonds and rising interest rates. Currently, the yield on Japan's 10-year government bond is about 2.81%, the 2-year yield is about 1.56%, and the 30-year yield is about 3.97%. With the delay of the BOJ in raising interest rates, expansionary fiscal policies will inevitably drive up inflation further, all of which constitute fundamental factors for the continued depreciation of the yen.
However, while the continuous depreciation of the yen can expand Japan's export advantage, this advantage is being offset by rising import prices, as it persistently drags down domestic consumer demand in Japan. Moreover, the losses brought by the depreciation of the yen significantly diminish the returns for foreign capital investing in Japan's capital market. Pressures from several fronts have forced the Japanese government to confront the problem of the yen's undervalued status and take measures to intervene in the market. A more effective and conventional measure would be for the BOJ to raise interest rates to narrow the interest rate differential and curb inflation, but the Japanese government worries that rate hikes would further impact domestic demand in Japan. From market reactions and interpretations, the majority believe that the impact of Japan's market intervention is short-term. To fundamentally resolve the yen crisis, it is still necessary to start from the fundamentals, address the problems of inflation and fiscal deficit, promote yen rate hikes, and achieve the normalization of monetary policy. Naturally, this means that the policy orientation of the Takaichi government needs a fundamental shift, which would land it in a politically passive position. Therefore, there is reason to believe that the policy orientation of the Takaichi government is the fundamental factor behind this round of continuous yen depreciation. Choosing the direct market entry intervention means of "buying time with space" amidst political and economic dilemmas is largely an expedient measure.
A distinct difference in this round of yen fluctuations is the participation of the United States. This is the first time in the past 15 years and an extremely rare occurrence since the Plaza Accord. Consequently, some believe this signifies a "new Plaza Accord" between the U.S. and Japan, with both countries jointly promoting the appreciation of the yen. In reality, the joint market entry intervention by Japan and the U.S. involves considerations on the Japanese side to leverage U.S. dollar credit to support the yen. On one hand, this indirectly indicates the U.S. attitude toward the yen. On the other hand, Japan's unilateral market intervention yielded poor results and required external credit support. U.S. Treasury Secretary Scott Bessent stated in a recent interview that he supports Japan using the Federal Reserve's FIMA (Foreign and International Monetary Authorities) repo facility in the future, a move that allows borrowing U.S. dollars from the Fed by pledging U.S. Treasuries, thereby obtaining intervention funds without selling U.S. Treasuries. In fact, during its previous two rounds of market intervention, the BOJ had situations where it sold holdings of U.S. Treasury bonds in exchange for U.S. cash to buy yen. The concern on the U.S. side is actually the impact of yen fluctuations on the U.S. market. In particular, once the massive accumulated carry trade funds reverse, it could bring violent shocks to the market, much like what occurred in August 2024. Amid the ongoing divergence in the U.S. stock market, shocks from external capital flows could bring uncontrollable risk changes, which is what the U.S. worries about. Currently, the declining yen is not only increasingly unfavorable to Japan but also places constraints on the U.S. economy and capital market. "Risk prevention" is likely the primary reason why the U.S. supports Japan's market intervention to maintain the stability of the yen exchange rate.
Bessent also mentioned concerns that excessive depreciation of the yen might trigger currency fluctuations in emerging markets, leading to a situation reminiscent of the 1997 Asian financial crisis. Of course, under China's influence, the possibility of a crisis caused by competitive currency devaluation in emerging markets currently appears slim. However, for the U.S., the yen driving the depreciation of emerging market currencies would strengthen the USD, which is detrimental to the trade balance desired by the United States itself. Therefore, factors disfavoring excessive depreciation of the yen do exist for the U.S. At the same time, the situation of the USD is hardly optimistic. With the scale of U.S. national debt surpassing an unprecedented USD 40 trillion, the long-term weakening of USD credit has become irreversible. Considering the stickiness of inflation, U.S. Treasury yields are likewise climbing continuously. On August 6, the U.S. 10-year benchmark yield was reported at 4.615%, the 2-year at 4.177%, and the 30-year at 5.167%, all hitting recent highs. This implies that the possibility of the U.S. cutting interest rates this year is not only fading day by day, but rate hikes may well become necessary. Under these circumstances, the appreciation of the yen helps the US achieve an external account balance in trade and investment, potentially sharing part of the pressure from U.S. rate hikes. Against the backdrop of yen appreciation, the U.S. side sold euros and bought yen, driving the dollar index below 100.
In this regard, the joint U.S.-Japan intervention in the yen holds the significance of mutual need. Not only is it far lower in scale and intensity than the situation during the Plaza Accord, but against the backdrop of China's greatly expanded market size, it is even harder to sway the trade and investment trends of emerging markets as it did previously. Bessent also expressed mild criticism of the Japanese government's persistent fiscal expansion policies during his interview. If Takaichi continues to expand fiscal spending, subsidize domestic consumer demand, and simultaneously suppress interest rate hikes by the BOJ, then rising inflation and the outflow of carry trade capital will not only exacerbate distortions in the Japanese economy but also make it difficult for the U.S. to eliminate trade deficits and fiscal deficits, thereby dragging down the dollar and U.S. capital markets.
Judging from current market reactions, with the interest rate differential between the U.S. and Japan maintained at a high level, the trend of yen depreciation is unlikely to be reversed by the joint intervention of the two countries. A report by Goldman Sachs points out that intervention alone can only buy time, and the real way out lies in promoting capital repatriation to reverse the trend of Japanese investors favoring overseas assets over the past decade. Bessent emphasized in his interview, "while intervention can send a signal to markets, ultimately it is policy that changes markets", thereby urging the Japanese side to implement policies that can win market trust. In this regard, the root cause for genuinely solving the problem still lies in the convergence of monetary policies between the U.S. and Japan, narrowing the interest rate differential between the two nations. Naturally, judging from the current degree and frequency of U.S.-Japan intervention, the depreciation of the yen has clearly deviated from its track and will not persist for long.
However, this joint U.S.-Japan intervention in the yen reveals the stance of the Trump government regarding a strong dollar. Trump previously maintained an ambiguous stance on the strength of the dollar, simultaneously hoping a strong dollar would maintain the prosperity of the U.S. capital market while largely harboring complaints about the depreciation of other currencies, believing it would cause the U.S. to lose its edge in foreign trade. In this joint U.S.-Japan action, the market was actually shown the boundaries of the USD. This is perhaps one of the takeaways for the international capital market after setbacks in arbitrage.
Final analysis conclusion:
Amid the persistent historical lows of the yen, the joint intervention by the U.S. and Japan in the yen exchange rate temporarily lifted the yen and altered the strong trajectory of the dollar under intensifying geopolitical risks. The signal it releases lies in the political intention of the Japanese side to buy time with space and the U.S. side's need for risk prevention. Eliminating this "black swan" risk in the future still requires the convergence of monetary policies and choices in political decision-making by both sides.
______________
Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
