Summary of Key Points
The recent joint intervention by the United States and Japan in the Japanese yen exchange rate may seem like an emergency measure to counter the yen’s depreciation, but in reality, it undermines international market rules and weakens the financial credibility of both countries. Zhu Min believes that this does not constitute a “new Plaza Accord,” and that such interventions are unlikely to be sustainable (due to the temporary nature of the FIMA tool and the rise in U.S. Treasury yields). The root causes of the yen’s depreciation lie in structural issues such as Japan’s high debt levels, trade deficits, and capital outflows, which cannot be resolved by mere intervention. The dominance of the dollar has long outstripped its underlying economic fundamentals, and this latest action further accelerates the erosion of its credibility. On the other hand, the yuan is entering a critical period of internationalization, supported by its stable monetary reputation and various aspects such as trade and reserves.
I. U.S.-Japan Intervention: “Market Rescue” or “Rule Disruption?”
The joint intervention by the U.S. and Japan has ulterior motives: Japan fears a sharp depreciation of the yen (which would increase import costs and undermine domestic financial stability), while the U.S. is concerned about Japan selling its U.S. Treasury bonds to support the yen (which could impact the U.S. bond market). The problem is that they did not follow the rules set by the IMF; instead, they acted bilaterally, essentially changing the rules of the game without consultation. This not only undermines market fairness but also compromises the independence of the Bank of Japan, which should remain neutral. The leakage of information regarding the U.S. Treasury secretary’s “note” was more of a political gesture to intimidate speculators than a serious multilateral negotiation.
II. Why are Interventions “Unsustainable?”
Zhu Min provides two compelling reasons:
1. **The FIMA Tool is a “Short-Term Solution”: Japan used the FIMA (Foreign Exchange Interbank Market Arrangement) facility, which was introduced by the Federal Reserve in 2020 as an emergency measure. Foreign central banks can use this facility to exchange U.S. Treasury bonds for dollars, with a seven-day repayment deadline. Japan has already utilized approximately $60 billion under this program, reaching the daily limit, and further use would deplete its quota, along with creating significant short-term repayment pressures.
2. The U.S. Faces Contradictory Results: The U.S. intended to stabilize Treasury yields by intervening, but on July 31, the yield on 10-year U.S. Treasuries rose to 4.7388% (the highest since 2025), indicating that markets do not believe in the credibility of U.S. debt. This is because the U.S. government’s debt-to-GDP ratio exceeds 100%, imposing a heavy interest burden, and market forces are driving up borrowing costs. As a result, the U.S. is unlikely to continue supporting Japan’s intervention efforts.
III. Yen Depreciation: Not a Short-Term Fluctuation, but a “Structural Problem”
The yen’s depreciation is a deeply rooted issue, exacerbated by three interlocking problems:
1. Debt Overhang: Japan has the highest debt-to-GDP ratio in the world, resulting from years of loose monetary policies. Interest payments account for 9.6% of its budget, leaving it unable to raise interest rates without causing a financial collapse.
2. Trade Deficit: Japan used to have a trade surplus from exporting automobiles and electronics, but now it has a deficit (except for a brief surplus during the pandemic). This decline in competitiveness reduces foreign exchange earnings, further weakening the yen.
3. Crazy Capital Outflows: Japan’s low interest rates have led to a massive outflow of capital overseas (3-4% of GDP in the past two years), reducing domestic liquidity and further devaluing the yen.
The Bank of Japan is caught in a dilemma: raising interest rates to curb inflation would exacerbate debt problems, while not raising rates would lead to higher import prices and inflation. Therefore, the yen is likely to continue to depreciate.
IV. The Dominance of the Dollar: A “Puffy” Giant on the Decline
The current status of the dollar no longer reflects U.S. economic strength:
- During the Bretton Woods system, the U.S. manufacturing sector accounted for 50% of global output, its GDP accounted for 44%, and it held 52% of world gold reserves, providing tangible support for the dollar’s value. Today, the U.S. GDP accounts for only 25% of global output, and its manufacturing share has dropped to 17%, yet the dollar still constitutes 58% of global foreign exchange reserves (although this figure has declined from 78%).
- The rise in U.S. Treasury yields following the intervention, along with falling bond rates in Europe (France and Germany), indicates that capital is fleeing the dollar. These developments highlight growing doubts about the dollar’s credibility. Additionally, previous U.S. tariffs and sanctions have strained its dominance, suggesting a downward trend for the dollar.
V. The Internationalization of the Yuan: “Stability” is the Key Opportunity
Now is the perfect time for the yuan to gain international recognition:
1. Dollar Credibility Declining: The dollar’s share of global foreign exchange reserves is declining, while the proportion of gold and other non-traditional currencies is rising, indicating a multi-polarization of the international monetary system.
2. The Yuan has Four Strong Supports:
- Strong Trade Position: China is the world’s largest trader, and demand for yuan for payments and financing is increasing (the yuan is now the third-largest payment currency and the second-largest trade financing currency).
- Enterprise Internationalization: Chinese companies’ overseas investments are promoting the use of the yuan.
Reserve Currency: More than 80 countries have included the yuan in their foreign exchange reserves.
Swap Networks: The yuan’s extensive swap arrangements make it an integral part of the global financial system.
In a world of geopolitical turmoil and increasing uncertainty, stability is highly valued. The yuan’s stability presents a significant opportunity for internationalization.
In conclusion, the U.S.-Japan intervention is a short-sighted move that exposes their respective vulnerabilities. Meanwhile, the yuan’s opportunities lie in this chaos; by maintaining stability, it can secure a place in a multi-polarized monetary landscape.