Soundings

On this week’s To Do List: “Buy Japanese Yen (JPY) $5-10 bil.”

The United States acted Friday to stem a decline in the value of the Japanese yen (JPY). Following a roughly $50 billion intervention by Japanese authorities last Thursday, the United States sold euros and bought JPY in what’s been described as a historic currency intervention.

The yen’s value has been in decline for over a decade but intensified post-COVID as monetary policy diverged across the developed world.

As the U.S. Federal Reserve Bank moved to fight inflation through a series of interest rate hikes in 2022-2023, nominal yields on 10-year U.S. Treasuries rose from an average of 2.95% in 2022 to approximately 4.70% today. In contrast, the Bank of Japan maintained a negative interest rate policy through early 2024 in an effort to stimulate the Japanese economy.  Ten-year Japanese government bond (nominal) yields remained anemic – between 0.2% and 0.9% from 2022-2024, before advancing to the current rate of 2.9%.

Lower rates provide relief for debt service, important in a country like Japan where debt-to-GDP is roughly 235%. (Debt-to-GDP for the U.S. is closer to 120%.) However, the long-standing interest rate differential between Japan and other countries has led investors to borrow yen and invest elsewhere, maintaining downward pressure on the yen.

This has meant that Japan has had to be a meaningful investor in its own country – 88% of debt is held domestically – even as it invests meaningfully beyond its borders. Japan remains the single largest foreign holder of U.S. Treasuries at just over $1 trillion and has made hundreds of billions of dollars in direct investments across the U.S. Additionally, while Mexico, Canada, China, the United Kingdom, and Germany all surpass Japan in trade volume with the U.S., Japan and the U.S. exchange well over $300 billion in goods and services annually, approximately 30-40% of which is related-party trading – or the import and export of goods between parent companies and subsidiaries.

In the near term, the Iran War has upped Japan’s economic pain. Lacking domestic oil reserves, Japan imports virtually all of its oil from the Middle East and has borne the brunt of supply constraints owing to the blockade of the Strait of Hormuz. As oil transacts in U.S. dollars, this has been a more acute blow to the yen.

In discussing the rationale for the yen purchase, U.S. Treasury Secretary and to-do list maker Scott Bessent, shared his view that “A stable yen is not only important for the U.S., but very important for the entire region.” There is both nuance and significance in how this recent intervention has been orchestrated. An earlier $70 billion intervention in April and May of 2026, saw Japan sell U.S. Treasuries to purchase yen putting unwelcome pressure on the U.S. dollar. Notably as the U.S. and Japan moved jointly this month to buy yen, the U.S. was a seller of euros and Japan tapped the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) Repo Facility, borrowing against rather than selling its Treasury holdings. A friend in need, is a friend indeed. At least that’s the signal.

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