The United States has joined hands with Japan to engineer one of the strongest rebounds in the Japanese yen in years. As reported by Financial Times, this is one of the closest coordination between the two countries on currency intervention in decades. This is happening at a time when the yen, battered by years of weakness, had plunged to levels last seen in 1986, raising concerns over rising inflation in Japan, financial market volatility and wider implications for the global economy.
By the close of New York trading on Friday, the yen had strengthened to 157.40 against the US dollar, its strongest level since early May. Just two days earlier, it had been hovering near four-decade lows, piling pressure on Japanese households and businesses facing soaring import costs.
The sharp turnaround was influenced by direct intervention in the currency market, coordinated messaging from US and Japanese officials and growing signs that Washington is willing to actively support Tokyo‘s efforts to stabilise the yen.
Why Washington is backing Tokyo
The weakening yen has implications far beyond Japan. A cheaper currency makes Japanese exports more competitive, which could increase trade tensions with the United States. Bloomberg noted that the more the yen depreciates, the greater the trade advantage Japan gains, potentially drawing criticism from President Donald Trump.
Financial market stability is another concern. Volatility in Japan’s government bond market has already spilled over into US Treasury markets this year, an issue that has drawn criticism from Bessent.
There is also another reason for US involvement. If Japan were forced to defend the yen on its own, it could eventually have to sell some of its vast holdings of US Treasuries to fund further interventions. Such sales could push up US borrowing costs, an outcome Washington wants to avoid.
Reuters also reported that Japan’s Finance Ministry noted another funding option by saying authorities have “a broad range of tools” available, including access to the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) Repo Facility. The facility allows countries such as Japan to obtain dollar liquidity without having to sell US Treasury holdings outright.
Despite the dramatic rebound, economists caution that intervention alone may not be enough to reverse the yen’s long-term decline. “Without backing from rate differentials, the impact of FX interventions is likely to be relatively short-lived,” Evercore ISI strategists Marco Casiraghi and Gang Lyu wrote in a note on Friday. They added that while the Bank of Japan has identified exchange rate movements as a risk to inflation, it has so far resisted taking a more aggressive role in supporting the yen through monetary policy.
Scott Bessent emerges as a key figure
US Treasury Secretary Scott Bessent has played an unusually prominent role in the intervention.
The former hedge fund executive, who has long followed Japan’s financial markets, first attracted attention when he said in an interview with Fox Business that the yen was “very undervalued” and that “excess volatility” in currency markets was unhealthy.
Interest intensified after a Reuters photograph from a Cabinet meeting showed Bessent’s notepad carrying a handwritten to-do list that read, “Buy Japanese Yen (JPY) $5-10 bil
Japan’s Finance Minister Satsuki Katayama publicly praised Bessent, describing him as “one of the most knowledgeable experts in markets.”
Meanwhile, Finance Ministry currency chief Atsushi Mimura said Japan was receiving more than just “moral support” from Washington.
“Bessent’s influence is significant,” Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute and a former Bank of Japan official, told Bloomberg. “The US is now becoming more cooperative with Japan’s interventions.”
US and Japan coordinate to push back against speculators
According to reports from Bloomberg, Reuters and the Financial Times, Japanese authorities bought yen and sold dollars during New York trading on Friday. The Financial Times reported that the Federal Reserve Bank of New York sold euros to buy yen on behalf of the US Treasury, marking Washington’s first direct intervention in support of the Japanese currency in more than a decade.
Reuters separately reported that the Treasury had informed several banks that it might intervene in the yen market and asked them to “stand ready for future action.”
Bloomberg also reported that at least two major US banks were asked by the New York Fed to check yen-euro exchange rates during the trading session, signalling preparations for coordinated action.
The intervention had an immediate impact. The yen gained more than 1% against both the dollar and the euro on Friday after surging over 3% against the US currency a day earlier.
Bloomberg estimates suggest Japan spent around ¥8.45 trillion ($52.8 billion) on Thursday alone to support the yen, potentially making it Tokyo’s largest-ever single-day currency intervention.
Authorities have made it harder to bet against the yen
Currency traders believe the latest intervention differs from previous attempts because of the unprecedented level of cooperation between Tokyo and Washington.
“The market had underestimated the authorities,” Michiyoshi Kato, senior adviser in the currency and rates client team at Sumitomo Mitsui Trust Bank, told Bloomberg. “It has likely become more difficult for speculators to sell the yen. If there is another intervention, the dollar-yen exchange rate will likely fall below 155 yen.”
Japan has intervened several times over the past few years to support its currency, but those gains typically faded within days or weeks. Analysts say coordinated backing from the United States significantly raises the risks for traders betting that the yen will continue to weaken.
Why the yen has remained under pressure
The Japanese currency has struggled for years because of a combination of rising oil prices, persistent government budget deficits and a large gap between Japanese and US interest rates.
Although the Bank of Japan has gradually raised interest rates, they remain far below US levels. On Friday, the central bank kept rates unchanged in an 8-1 vote after raising them to 1% in June—the highest level since 1995, but still well below the US Federal Reserve’s upper policy rate of 3.75%.
At his post-policy meeting press conference, Bank of Japan Governor Kazuo Ueda left open the possibility of future rate hikes but stopped short of signalling any immediate action, offering little fresh support for the currency.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor in the respective jurisdiction.