U.S.-Japan Yen Intervention Puts Global Interest Rates in Focus

Executive Summary

Japan and the United States recently jointly intervened to support the yen after the currency weakened to nearly ¥164 per dollar, its lowest level in roughly four decades. The operation briefly drove the yen to ¥155.20, its strongest level since May, before it surrendered part of the gain and settled near ¥157.50. The intervention provided immediate relief, but its longer-term effectiveness will depend less on the amount spent than on interest rates. Previous episodes show that official yen purchases have struggled when Federal Reserve policy was restrictive and proved more durable when U.S. rates subsequently declined.

Law of Diminishing Returns

Japan’s interventions are becoming larger while producing shorter-lived results. The latest action also comes as demand weakens for Japanese government bonds, threatening to push domestic yields higher and make JGBs more competitive with U.S. Treasuries.

That combination creates several risks: Japan could reduce its Treasury holdings to finance future interventions, Japanese investors could repatriate capital as domestic yields rise, and a rapidly appreciating yen could destabilize the multitrillion-dollar carry trade, where an investor borrows money in a currency or asset with a low interest rate and uses those funds to buy higher-yielding assets or currencies.

Japan’s Expensive Battle

Since resuming yen purchases in September 2022, the Ministry of Finance has spent an estimated $240 billion to $255 billion supporting the currency, depending on the exchange rates used to translate official yen figures. Despite those purchases, the currency subsequently fell to new multidecade lows.

That total excludes last week’s actions because Japan has not released the official amount. Preliminary money-market data and private estimates suggest authorities may have spent nearly $100 billion over two days and potentially a record 48-hour intervention.

The latest operation lifted the yen sharply, but its partial reversal illustrates the central problem: intervention can force speculators to exit positions, but it cannot permanently overcome the interest-rate differential between Japan and the United States.

History Points to Interest Rates

The closest precedent occurred June 17, 1998, when U.S. and Japanese authorities jointly bought yen. The U.S. sold $833 million, divided between the Treasury’s Exchange Stabilization Fund and the Federal Reserve. The operation strengthened the yen by more than ¥6 per dollar.

The Fed did not immediately change policy, keeping its benchmark rate near 5.5% through the summer. A more durable yen recovery came after Russia’s default and the collapse of Long-Term Capital Management destabilized markets.

The Fed cut rates by 75 basis points from September through November. Safe-haven demand and expectations of easing pushed longer-term Treasury yields down by 40 to 95 basis points during one intermeeting period, according to the Federal Reserve.

The lesson is that intervention interrupted disorderly trading, but falling U.S. rates and a broader risk unwind ultimately altered the exchange-rate trend.

Japan’s 2022 experience was different. The country resumed yen purchases in September, but those transactions collided with the Fed’s most aggressive tightening cycle in decades. The Fed raised its target range to 3% to 3.25% in September, reached 3.75% to 4% in November and ended 2022 at 4.25% to 4.5%. The widening rate gap continued to reward investors for borrowing yen and buying dollar assets.

Today, the BOJ’s policy rate is 1%, compared with the Fed’s 3.5% to 3.75% range. The two-year Treasury yielded 4.XX% and the 10-year 4.XX% on Aug. XX, preserving a substantial incentive for carry trades.

Weak JGB Auction Raises Contagion Risk

Japan’s first major coupon auction following the intervention produced unusually weak demand. The bid-to-cover ratio for the 10-year JGB sale fell to 2.56 from 3.13 at the previous auction and a roughly 3.3 average. Investors submitted ¥5.06 trillion of competitive bids for ¥1.98 trillion accepted.

The lowest accepted price was ¥98.46, producing a 2.9% yield, compared with a 2.84% yield at the average price. That six-basis-point auction tail signaled that investors demanded a substantial concession to absorb the debt.

The 10-year yield climbed toward 2.87%, while JGB futures declined. At writing, the yield is again approaching the 2.9% level reached in July, its highest in about 30 years.

The weak sale suggested investors want clearer guidance from the BOJ about inflation, future rate increases and bond purchases. A sustained move above 2.9% could pressure other G-10 sovereign markets by making Japanese debt more attractive to domestic investors.

Orderly Reallocation or Disorderly Unwind

Japan is the largest foreign holder of Treasuries, owning roughly $1.14 trillion. Repeated unilateral intervention could eventually require Japan to liquidate dollar reserves, potentially including Treasuries, to finance yen purchases. Those sales would raise U.S. yields.

Washington’s participation reduced that immediate risk. The U.S. reportedly sold euros to purchase yen, while a Federal Reserve facility allowed Japan to obtain dollars against Treasury collateral instead of selling the securities.

Higher JGB yields nevertheless create a longer-term challenge. Japanese investors may repatriate capital or reduce purchases of U.S. debt as domestic bonds offer more competitive returns without currency risk.

Some analysts estimate the BOJ may need as much as 100 basis points of additional tightening to produce a lasting yen recovery. That could destabilize the yen carry trade, forcing investors to buy yen and sell equities, corporate bonds and emerging-market assets.

Treasuries could initially rally on safe-haven demand before reduced Japanese buying and capital repatriation pushed long-term yields higher.

Intervention alone buys time. Whether the latest operation stabilizes global markets will depend on BOJ tightening, Fed policy and whether rising Japanese yields trigger an orderly reallocation—or a disorderly unwind.

We want to hear your views.

How concerned are you that rising Japanese government bond yields could reduce Japanese demand for U.S. Treasuries?

Please share your comments below and click here for prior editions of “Treasury & Rates”