Over the past five years, the Japanese yen has lost 30% of its value against the US dollar and nearly as much against the pound. The currency recently hit a 40-year low against the greenback. Now, powerful figures in global finance are drawing a line in the sand.
Over the weekend, Japan's Ministry of Finance and the US Treasury confirmed they had jointly intervened in currency markets to support the yen. Japan is thought to have sold $59 billion to buy yen, with Washington staging a smaller intervention – its first in Japan since 2011 – in support.
The move sent the Japanese yen up 3.5% against the US dollar, a significant rise in foreign-exchange terms that reversed months of depreciation. Japan's own interventions had become increasingly ineffective. America brings much more potential firepower to the table.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Why is the US buying Japanese yen?
US Treasury secretary Scott Bessent has shown markets there is “a new sheriff in town”, says Katie Martin in the Financial Times. The real mystery is why Washington is getting involved at all. One explanation is simply that Donald Trump likes Japan, telling reporters “Japan's been very good to us, with the exception, of course, of Pearl Harbor”.
Self-interest, too, may be motivating Bessent. Japan's “massive sales” of dollar assets (mainly US Treasuries) are raising US borrowing costs at a time when government yields are already under pressure. His solution? “Stand behind Japan like a scary big brother” to “scare off the yen sellers.” The Japanese yen stabilised at around 157 to the dollar this week, stronger than the 163 level prior to the intervention.
The operation is likely to halt, at least temporarily, a “disruptive further depreciation” of the yen, says Brad Setser of the Council on Foreign Relations. A weak yen tends to pressure other Asian currencies lower. By making the region's exports cheaper, weak Asian currencies cut against the White House's desire for US re-industrialisation. The administration of a short, sharp shock to speculators betting against the Japanese yen might cause them to re-evaluate the trade.
Recent market “negativity” towards Japan has been overdone. The country has several important strengths, including a big current account surplus and ownership of huge tranches of overseas assets.
The one missing piece is higher interest rates. At 1%, Japanese rates are far below those in America, which causes steady selling pressure as local investors seek better yields overseas. Therein lies the rub, says Robin Brooks on Substack. Japan cannot afford to raise interest rates because of its mammoth government debt, which is equivalent to 248% of GDP. But without the support of rate hikes, this currency intervention will ultimately “fail like all previous ones”. Despite its slide, the Japanese yen is probably still overvalued. Its rout is “a symptom of a debt crisis that's getting papered over”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.