Summary of Key Points
Recently, Japan, in conjunction with the United States, intervened to stabilize the Japanese yen. This is the sixth time Japan has intervened in the yen exchange rate since 2022. Past five interventions have been mostly short-term effective but long-term ineffective; the two times with better results relied on external factors such as a weakening U.S. dollar. This latest intervention did not make extensive use of the Federal Reserve’s FIMA (Foreign Exchange Market Intervention Account) tool but instead relied on Japan’s own short-term U.S. government bonds and foreign exchange reserves. Although it was a joint effort, it is fundamentally different from the 1985 Plaza Accord, and due to the constraints imposed on both Japan and the United States, such interventions are unlikely to become the norm.
I. Multiple Interventions in the Yen: Easy to “Put Out Fires” in the Short Term, Difficult to “Cure the Problem” in the Long Term
Since 2022, Japan has conducted five rounds of yen intervention (this is the sixth time), with a record of more failures than successes:
- Short-term effectiveness, but limited duration: After the first three and fifth interventions, the yen only rebounded for 2 days to one and a half months before returning to a downward trend.
- Few “effective” interventions relied on external factors: The second intervention (October 2022) led to a yen recovery that lasted 12 months due to peak U.S. inflation and the Federal Reserve’s slowdown in interest rate hikes, causing the U.S. dollar index to fall by 7.7%. The fourth intervention (July 2024) also resulted in a recovery after the Fed cut interest rates, weakening the dollar.
- Persistent downward trend: As long as the interest rate differential between Japan and the United States remains large (low Japanese rates vs. high U.S. rates), the fundamental driving force behind the yen’s depreciation persists. For example, after this latest intervention, the yen fell back from around 155 to around 159.
II. Intervention “Munitions”: Japan Has Adequate Reserves; FIMA Is Just a Backup
Japan does not need to borrow U.S. dollars for its interventions; it can rely on its own foreign exchange reserves:
- Ample reserves: Japan has $1.09 trillion in foreign exchange reserves (the second-largest in the world), with over 90% in U.S. dollars, including $162.3 billion in deposits and a large amount of short-term U.S. government bonds, providing good liquidity.
- Reason for not using FIMA: FIMA is a Federal Reserve tool that incurs higher interest costs when using U.S. bonds as collateral to borrow dollars. It is more cost-effective for Japan to sell its own short-term U.S. bonds or use its reserves to obtain yen. In fact, Japan’s reserves even increased during the first five interventions.
- Minimal market impact: When selling short-term U.S. bonds, Japan is very cautious—either waiting for the bonds to mature or using its reserves to gradually sell them, resulting in minimal fluctuations in the yields of these bonds.
III. Not a New Plaza Accord: Different Nature and Purpose
The 1985 Plaza Accord was a joint effort by five countries to weaken the U.S. dollar; this recent intervention is quite different:
- **The Plaza Accord was a “systemic adjustment”: At that time, the U.S. dollar was overvalued, and the five countries agreed to a long-term depreciation of the dollar. This intervention is merely a temporary measure without a comprehensive plan. The United States used euros to buy yen without consulting Europe, which caused some friction with its allies.
- Uncertain outcomes: Even if the U.S. dollar weakens, the yen may not appreciate significantly (the dollar fell 2% last year, but the yen only rose 0.3%).
- High risks: If the yen appreciates too quickly and Japan raises interest rates, those who borrowed yen to buy U.S. assets will likely sell their dollars and repay in yen (triggering a reversal of carry-trade positions), which could lead to global financial instability.
IV. Interventions Are Unlikely to Become the Norm: Both Japan and the United States Have Constraints
Neither country dares to intervene frequently:
- Japan’s constraints: The IMF stipulates that countries with freely floating exchange rates cannot intervene more than three times within six months, and each intervention must not exceed three days; otherwise, their currency rating may be downgraded (affecting Japan’s credit). Japan has adhered to these rules in its previous interventions, sometimes using a strategy of combining multiple interventions over several days to meet the limit.
- United States’ constraints: The U.S. only has $37.9 billion in foreign exchange reserves and must “offset” the effects of its interventions (to avoid affecting domestic money supply). It also fears being labeled as engaging in “competitive devaluation,” which could disrupt the global exchange rate order.
Therefore, this joint intervention is just an occasional “emergency measure” and is not likely to become the norm.
(The entire text is explained in plain language to make the logic and limitations behind Japan’s yen interventions understandable to a general audience.)