Summary of Key Points
For the first time since the 2011 East Japan earthquake, Japan and the United States jointly intervened in the Japanese yen exchange rate, purchasing yen to curb its continuous depreciation. This intervention caused the yen to appreciate by nearly 5% within two days. However, the fundamental issues underlying the yen's weakness (such as the large interest rate differential between the two countries, high energy import costs, and arbitrage trading) remain unresolved. Both countries may continue to intervene in the future, and markets expect the Bank of Japan to raise interest rates in September. Whether the yen can strengthen in the long term depends on monetary policy and structural adjustments.
Detailed Analysis
1. Why did Japan and the US need to jointly rescue the yen? Trying alone was ineffective!
Japan had attempted to stabilize the yen twice before: in April and May, but the yen only rebounded for a few days; in June, when interest rates were raised to 1% (the highest level in 31 years), it still did not stabilize. This time, the yen fell to a 40-year low, causing significant problems—imported goods (especially energy) became more expensive, inflation soared, and real household incomes decreased.
Why did the US help? Firstly, because Japan is an ally; secondly, a weak yen would render Trump's tariff policies ineffective (Japanese goods would become cheaper, making the tariffs less impactful); thirdly, if Japan tried to stabilize the yen on its own, it would have to sell its $1.1 trillion in US bonds to acquire dollars, which would increase the yield on US Treasury bonds and make borrowing more expensive for the US economy. Therefore, the two countries decided to act before the Federal Reserve might raise interest rates next month.
2. How was the joint intervention carried out? How much did it cost?
On Japan's part: $5.3 trillion (about $33.8 billion) was used to purchase yen during the intervention last Friday. On the US side, the Treasury Secretary mentioned purchasing yen for an amount ranging from $5 billion to $100 billion, with assistance from the Federal Reserve in New York—by selling euros to buy yen (this avoided directly selling US bonds and preventing an increase in their yield).
Additionally, the US announced plans to expand the scope of the "FIMA repurchase facility," which allows Japan to use its US bonds as collateral to borrow dollars without having to sell them directly, thereby alleviating the financial pressure during the intervention. However, this facility has limited capacity and cannot solve the problem permanently.
3. The yen appreciated after the intervention, but will they continue to intervene in the future?
On the day of the intervention, the yen rose by more than 1% in short term, with the US dollar falling to a low of 155.2 against the yen (the strongest level since early May), before returning to around 157 by the end of the trading day. Both countries have indicated their willingness to intervene again if necessary: the Japanese Finance Minister stated that they would not hesitate, and the US Treasury Secretary also expressed continued participation.
The market is also watching the Bank of Japan's actions: although it did not raise interest rates last week, it hinted that a rate hike could occur in September. Institutional analysts believe a hike in September is almost certain; if it is delayed until October, the yen might fall again. Expectations of a rate hike have pushed the yield on 2-year Japanese Treasury bonds to a 1995 high (1.545%).
4. What are the underlying reasons for the yen's continuous depreciation? It's not about speculation, but fundamental issues
Experts say the decline in the yen is not due to deliberate short-selling; rather, there are three main problems:
- Large interest rate differential between Japan and the US: Japanese interest rates are only 1%, while those in the US are 3.5%-3.75%. Investors flock to the US for higher returns, causing the yen to weaken.
- Arbitrage trading: Investors borrow cheap yen to buy high-yielding assets in other countries (such as US Treasury bonds), leading to a large outflow of yen and a decline in its exchange rate.
- High energy import costs: Conflicts in the Middle East have pushed up oil prices, and Japan, being a major energy importer, spends more on oil, resulting in a significant outflow of foreign currency and further depreciation of the yen.
5. For the yen to strengthen in the long term, more than just intervention is needed
Most institutions believe that short-term interventions can only stabilize the yen temporarily. To achieve a long-term strengthening, three actions are necessary:
- The Bank of Japan needs to continue raising interest rates: This would reduce the interest rate differential with the US and encourage money to stay in Japan.
- The Federal Reserve should lower interest rates: If US interest rates fall, the differential would narrow, reducing pressure on the yen.
- Japan should adjust its policies: For example, by reducing fiscal spending (as previous fiscal measures aimed to weaken the yen) and clearly stating that it does not accept a weaker yen (although it previously argued that depreciation could have both positive and negative effects).
Otherwise, the yen may fall again—after all, the fundamental issues remain unchanged, and the "announcement effect" of the interventions will fade as market logic prevails.
Conclusion
This joint intervention was a temporary measure to stop the sharp decline in the yen. To address the underlying problems, the Bank of Japan's interest rate hikes and policy adjustments are crucial. In the coming months, the focus will be on the Bank of Japan's actions in September and whether the Federal Reserve continues to raise interest rates, as these factors will determine the direction of the yen. For individuals interested in the yen exchange rate, it is sufficient to monitor the policies of these two central banks.