The message beneath the yen intervention
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Illustration: Aïda Amer/Axios
The U.S. and Japanese governments have acted together to try to prop up the value of the yen on global currency markets. The way they did it contains a clue about U.S. goals — and has some worrying implications for global markets.
The big picture: Headline indicators have been steady across global financial markets this summer. Yet there are some signs of strains beneath the surface, particularly in the form of rising long-term borrowing costs at a time of elevated debt worldwide.
- The U.S. participation in the yen intervention may have been an effort to enable the Japanese to smooth gyrations in their currency without creating more market pressure for Treasury bonds.
- Japan has intervened in the market for the yen off and on for decades. What is unusual is for the U.S. Treasury Department to have joined the effort, and to do so in a manner that appears designed to prevent selling of Treasuries by the Japanese government.
Catch up quick: The Japanese government has been sweating yen weakness, which makes oil, food and other imports more expensive and creates financial stability risks.
- Late last week, the Treasury Department winked and nodded about its involvement with currency market intervention, with a social media post from Secretary Scott Bessent speaking of "a strong relationship and close coordination."
- In a press event at Camp David, with photographers present, Bessent had a pad in front of him with a "to-do" list that read: "Buy Japanese Yen (JPY) $5-10 bil."
- On Monday morning, both governments confirmed the effort. "Friday's coordinated foreign exchange actions countered disorderly yen movements," Bessent wrote on X. "We will not hesitate to participate in further joint intervention."
Zoom in: The two governments appear to have used complementary tools. The New York Fed, acting for the Treasury, reportedly sold euros to buy yen.
- Meanwhile, the Fed's Foreign and International Monetary Authorities (FIMA) Repo Facility gave Japanese authorities a way to borrow dollars against Treasury securities rather than selling those securities outright.
- In effect, the U.S. Treasury was acting to strengthen the yen-euro exchange rate. It apparently achieved its goal of strengthening the yen on global currency markets, without the Japanese government selling U.S. government debt on a large scale.
Between the lines: Longer-term U.S. borrowing rates have been marching upward in the last few months, with the 30-year Treasury yield touching new post-2007 highs in recent days. (It was around 5.23% at 11:45am Monday.)
- Other major countries' rates have also been elevated, reflecting global demand for capital to finance large fiscal deficits and the AI buildout. As global investors demand higher rates to finance massive U.S. deficits, the burden of interest costs on U.S. taxpayers is set to soar.
- There have been nagging worries that rising Japanese interest rates will prompt the end of the global carry trade, in which hedge funds borrow at low rates in yen to buy higher-yielding assets elsewhere. If the Bank of Japan deals with its currency weakness and inflation problem solely through rate hikes, it could accelerate that process.
- A plausible story for the U.S. currency intervention is that Bessent is seeking to help the Japanese take action on yen weakness without creating new stress for Treasury bonds, though he and the Treasury have emphasized U.S.-Japanese friendship as the rationale.
For the record: A Treasury official tells Axios that the action was a response to the speed and disorderliness of the yen sell-off, and meant to prevent that instability from spreading.
What they're saying: "Markets are treating this as a currency issue, but it's far bigger than that," Nigel Green, CEO of the financial consulting firm deVere Group, wrote in a note.
- "When two of the world's largest economies step into the market together for the first time in over a decade, they're telling investors something about stress building beneath the surface of the global financial system, not just about an exchange rate."
