The U.S. Treasury's surprise move to join Japan in shoring up the yen has sparked debate over its motivations and the broader implications for global currency policy. The yen initially surged from a 40-year low of 163 per dollar to 155, but has since given back half of those gains.
Japan's rationale is clear: the yen is at its weakest real trade-weighted level since the early 1970s, and a weak currency is stoking inflation through higher import prices, especially with oil prices climbing. Despite narrowing interest rate differentials with the U.S., the yen has continued to slide, prompting Tokyo to seek help.
For the intervention to have a lasting effect, analysts say it must be large enough to change trader expectations. Even then, the Bank of Japan may need to tighten monetary policy, as money market rates at 0.93% remain below consumer inflation at 1.5%.
Treasury Secretary Scott Bessent's primary goal appears to be preventing Japan from selling its massive $1.1 trillion holdings of U.S. Treasuries to fund intervention. By using the Federal Reserve's FIMA repurchase facility, Japan can temporarily swap its Treasury holdings for dollars, avoiding fire sales that could disrupt bond markets.
Bessent has asked the Fed to raise the daily limit on FIMA from $60 billion, a request that requires approval from the Federal Open Market Committee. This has raised concerns about Fed independence, which has traditionally applied to interest rate decisions but may now extend to foreign exchange operations.
Critics, including James Mackintosh of the Wall Street Journal, point out that expanding FIMA would enlarge the Fed's balance sheet, contradicting Chair Kevin Warsh's efforts to shrink it. This could effectively ease monetary conditions, a move with significant policy implications.
The Financial Times has floated the idea of a new era of "currency activism," citing Bessent's earlier use of the Exchange Stabilization Fund to support Argentina. However, economist Barry Eichengreen downplays the intervention's size—estimated at $88 billion over two days—as "small potatoes" and argues that only a rate hike by the Bank of Japan will truly strengthen the yen.
Eichengreen instead focuses on Bessent's concern about official Treasury sales driving up U.S. bond yields, which are at their highest since 2001. The Treasury's sale of euros to buy yen in late July marked its first joint intervention in 15 years, a move that caught the European Central Bank off guard.
This episode underscores a shift in the dollar's status as a reserve currency. As Eichengreen notes, foreign central banks are diversifying away from dollars, and the U.S. is reluctant to see them sell. "This is telling us that the dollar is not the attractive reserve currency it once was," he said.
While the U.S.-Japan cooperation is a positive sign, the lack of coordination with Europe—and the absence of a broader agreement like the Plaza Accord of the 1980s—suggests that currency diplomacy has become more fragmented and complex.
