Summary of Key Points
On August 2, the United States and Japan jointly intervened in the foreign exchange market (buying Japanese yen). On the surface, this was an attempt to support the yen, but in reality, it was a move to protect U.S. Treasury bonds. As Japan is the largest overseas holder of U.S. debt, if the yen collapsed, it would have to sell its U.S. bonds to buy dollars, which could cause U.S. bond yields to soar and trigger a collapse in the U.S. stock market. The Japanese economy is trapped in a dilemma: raising interest rates would lead to the depreciation of the yen (damaging the currency), while not raising rates would result in the collapse of the country due to debt pressures. The United States has temporarily stabilized the situation by "selling euros to buy yen" and expanding the FIMA (Foreign Exchange Interbank Market Arrangement) mechanism (which allows foreign central banks to exchange U.S. bonds for dollars using those bonds as collateral), but the underlying structural problems remain unresolved. China is the only country that does not have to walk a tightrope in this situation.
I. How Dangerous Is the Japanese Economy? Five Figures Reveal the Truth
The crisis in the Japanese economy is not an exaggeration; it is based on concrete data:
1. A debt bill of 30 trillion yen: Japan's government debt accounts for 204% of its GDP (the highest in the world). The yield on 10-year Treasury bonds has risen from 0% in 2021 to nearly 3%, resulting in an additional annual interest payment of 30 trillion yen (about 1.5 trillion yuan, equivalent to half of Japan's annual military spending).
2. The central bank can no longer control interest rates: The policy rate set by the Bank of Japan is only 1%, but market interest rates have reached 2.8%. Governor Haruhiko Kuroda has directly stated that "the market should determine interest rates," acknowledging his inability to control them.
3. $160 billion in attempts to stabilize the exchange rate were ineffective: In May and July, Japan spent $73.7 billion and $87 billion respectively, but the yen still remained around 160 (its lowest level in 40 years). The money invested was essentially wasted.
4. The prime minister admits a worse situation than Greece: During Greece's debt crisis, debt accounted for 180% of GDP; now Japan’s debt accounts for 204%, and even the Japanese government acknowledges a more severe financial situation.
5. Japan’s GDP is being overtaken: In 2023, it was surpassed by Germany as the fourth-largest economy, and by 2026, it may be surpassed by India, indicating a continuous decline in economic status.
II. Is the United States Helping Japan? Actually, It’s Protecting Its Own Treasury Bonds
The U.S. Treasury Secretary's intervention is not out of generosity but out of fear that Japan will sell its U.S. bonds:
- Japan is the largest overseas holder of U.S. debt: Holding $1.14 trillion in U.S. bonds. If the yen continues to decline, Japan will have to sell these bonds to buy dollars, which could cause yields to skyrocket. Since U.S. bond yields serve as a benchmark for other assets (such as mortgage and corporate bonds), a rise in yields would lead to a collapse in the U.S. stock market.
- The United States’ strategic moves:
1. Selling euros to buy yen: This avoids devaluing the dollar.
2. Calling for the expansion of the FIMA mechanism: This allows foreign central banks to exchange U.S. bonds for dollars without publicly selling them. Japan can use this mechanism to obtain dollars to stabilize the yen without affecting the U.S. bond market.
- However, this is a band-aid solution: The market may interpret this as a sign that U.S. bonds are very fragile and could prompt other investors to sell their holdings even sooner.
III. Is the Ceasefire Between the US and Iran Related to the Yen? But It Doesn’t Solve Japan’s Problems
The ceasefire between the US and Iran may seem unrelated to the yen, but it is actually aimed at stabilizing oil prices and reducing pressure on the yen:
- The chain of events: Conflict between the US and Iran → Blockage of the Strait of Hormuz → Rising oil prices above $100 per barrel → Global inflation → Fed interest rate hikes → Strengthening of the dollar → Weakening of the yen. A ceasefire could break this cycle, stabilizing oil prices and reducing pressure on the yen.
- But Japan’s problems remain unresolved: Japan’s inflation is not solely due to oil prices; it is caused by the depreciation of the yen itself, which makes imported goods more expensive and drives up prices. The Bank of Japan predicts a core CPI of 2.5% in 2026, but its policy rate is only 1%, with real interest rates at -1.5% (meaning savings are losing value by 1.5% annually). As a result, people are converting their money into dollars and other currencies, further weakening the yen and exacerbating inflation. A ceasefire can only alleviate external pressures but cannot solve Japan’s internal problems.
IV. Three Tightrope Walks: One Break Leads to a Chain Reaction
The United States and Japan are walking on three intertwined tightropes, and any one break could trigger a cascade of failures:
1. Yen defense: Joint intervention and the expansion of FIMA are trying to prevent the yen from falling below 160. If this fails, Japan will sell its U.S. bonds, leading to a collapse in U.S. bond prices and the stock market.
2. Oil price control: A ceasefire between the US and Iran is intended to stabilize oil prices. If this fails, oil prices will rise, causing inflation, leading to Fed interest rate hikes and a stronger dollar, which will weaken the yen even more.
3. Negative interest rates: Japan is hesitant to raise rates due to debt concerns, but negative interest rates encourage capital outflows. If this continues, it will lead to a collapse in both the yen and U.S. bonds.
These three factors form a vicious cycle: stabilizing the yen requires controlling oil prices, but controlling oil prices is difficult without curbing inflation; failing to control inflation will deepen negative interest rates, leading to more capital outflows and further economic crises.
V. China Is Outside the Circle: Watching Others Walk the Tightrope
China is the only country in this situation that does not need to walk a tightrope:
- World’s largest foreign exchange reserves: With over $3 trillion, it has strong resilience to risks.
- Countermeasures against Japan: In January 2026, China implemented the strictest trade restrictions ever (covering thousands of military and civilian items, including rare earth exports), gaining the upper hand in trade relations.
- Stable yuan: The yuan is the only Asian currency that has not depreciated significantly compared to the yen, preventing capital outflows.
As the United States and Japan struggle on their tightropes, China remains calm, watching from below. Once one of the ropes breaks, whoever acts first will have the upper hand in the situation.
Conclusion
The joint intervention by the United States and Japan in the foreign exchange market is essentially a strategy to buy time. However, Japan’s debt problems, negative interest rates, and exchange rate crises are structural issues that cannot be resolved through short-term measures. While the United States may seem to have protected its own bonds, this intervention has exposed their vulnerability. China, on the other hand, is in a more advantageous position, waiting for the situation to change. As Lu Qiyuan said, "This is not prophecy; it’s arithmetic." The data does not lie, and the outcome is already written in the numbers.