US backs yen intervention as fears grow over Japan selling Treasuries

The United States has joined Japan in rare currency-market intervention to support the yen, amid concern that Tokyo might otherwise be forced to sell large volumes of US Treasury bonds to fund unilateral action.

The move has raised questions over Washington’s motive for joining an operation that has happened only rarely in recent decades. Analysts say a key factor is concern over the stability of the US Treasury market and Japan’s financial system.

Japan has become increasingly worried about the yen’s sharp decline. The currency weakened last Thursday to 163.73 yen per US dollar, its lowest level against the greenback in nearly 40 years, before recovering to 157.57 yen per dollar on Friday.

The joint yen-buying operation marks the first coordinated US-Japan intervention to purchase the yen since 1998. It is also the first joint currency intervention by the two countries since the G7 intervention in 2011, when authorities acted to weaken the yen after the major earthquake in Japan.

Avoiding forced Treasury sales

A central concern for Washington is avoiding a scenario in which Japan would have to sell large amounts of US government debt to obtain dollars for currency intervention.

Japan is the largest foreign holder of US Treasury securities. Any forced selling could ripple through the US bond market, push up yields and undermine confidence in the dollar system.

The focus has therefore turned to the Federal Reserve’s FIMA Repo Facility, which allows foreign central banks to access US dollar liquidity by using US Treasury holdings as collateral, rather than selling them outright.

Japan’s Finance Ministry said on Monday it planned to use the facility for future currency intervention. Masahiko Loo, senior macro strategist at State Street, said this signal could matter even more than the intervention itself because it reassures markets that Japan can raise dollar liquidity without dumping US Treasuries.

The concern extends beyond the yen alone. If the yen continues to weaken, it could trigger further selling of Japanese government bonds, lifting yields and spilling into global bond markets at a time when both Japan and the United States are facing higher long-term borrowing costs.

US 10-year Treasury yields have risen by almost 57 basis points since the start of the year.

US-Japan ties enter new phase

US President Donald Trump said the United States joined last week’s currency intervention to support the yen, show support for Japan and help stabilise the global economy.

Beyond protecting the US bond market, the intervention also reflects broader economic and geopolitical priorities for Washington. Oxford Economics said the US has long argued that the yen is significantly weaker than its fundamentals justify, creating what Washington views as an unfair trade advantage for Japanese exports.

If the US believes Japan’s fiscal policy is driving Japanese government bond yields higher and weakening the yen, joint intervention could buy time for the Bank of Japan until it is able to raise interest rates again later this year. However, analysts warned that sustainable yen strength would require tighter Japanese monetary policy, not repeated intervention alone.

Jesper Koll, expert director at Monex, said the move reflected a major shift in US-Japan relations under Trump and Japanese Prime Minister Sanae Takaichi.

He said the joint intervention showed that when Japan asks for help, the United States is prepared to respond. It also sends a geopolitical message to China that action, not words, defines leadership.

Questions over US tactics

Not all analysts believe the US role will strengthen the intervention’s impact.

Reports that Washington sold euros rather than dollars to buy yen surprised markets, as previous joint interventions usually relied on dollar assets as the funding source.

Robin Brooks, senior fellow at the Brookings Institution, said the move risked confusing markets and could prove counterproductive. He argued that unusual operational details, including the reported sale of euros, may reduce the effectiveness of US participation because markets will question why Washington did not use dollars directly to buy yen.

Brooks also warned that intervention cannot stop yen weakness if the root cause lies in Japan’s bond market. Although the Bank of Japan formally ended yield curve control in March 2024, it still buys large amounts of Japanese government bonds. Brooks said this continues to keep borrowing costs below where they would be in a freer market.

State Street also said intervention can buy time but cannot change the yen’s long-term direction by itself. The future path of the currency will depend more on Bank of Japan policy normalisation and hedging flows over the coming years.

For now, the joint action has shown that the yen’s fall is no longer only a Japanese problem. It has become a wider test of US bond-market stability, global financial confidence and the evolving economic alliance between Washington and Tokyo.

Source: Thansettakij