US and Japan coordinate yen defence against speculative bets

The United States and Japan’s decision to intervene in the yen market was preceded by months of preparation and closer-than-usual coordination between the two governments over exchange-rate policy.

The joint effort marked a rare public alignment between Washington and Tokyo on a currency issue that has historically been a sensitive diplomatic matter.

Japan has previously attempted to slow sharp yen declines through unilateral intervention, but those actions failed to establish lasting support for the currency. This time, backing from US Treasury Secretary Scott Bessent for a stronger yen provided Japanese officials with additional support in their efforts to counter speculative selling.

For Japan, the weak yen has pushed up import costs and increased pressure on household living expenses, creating challenges for successive governments, including that of Prime Minister Sanae Takaichi.

For the United States, a weaker yen reduces the trade advantage expected from President Donald Trump’s tariff policies, while a sell-off in Japanese government bonds could also affect US Treasury yields.

The shared concerns have led to closer discussions between the two countries on exchange rates and increased pressure on the Bank of Japan (BOJ) to continue raising interest rates.

Months of coordination before intervention

US involvement in yen-buying intervention was considered as early as January, when the New York Federal Reserve carried out rare rate checks to help Tokyo address the currency’s decline, according to a Japanese government official familiar with the preparations.

Japanese Finance Minister Satsuki Katayama said she and Bessent had held around 10 discussions, including online meetings, that covered exchange-rate issues.

“When he visited Japan in May, we talked three-and-a-half hours including over dinner,” Katayama said when announcing Japan’s coordinated currency intervention with the United States.

The May talks came after Japan conducted a major yen-buying intervention between late April and early May, which failed to reverse the currency’s downward trend.

Following the meeting, Katayama said the two countries were “coordinating very closely on foreign exchange and will continue to do so”.

Bessent also said Japan’s economic fundamentals were “strong and resilient” and would eventually be reflected in the exchange rate.

He repeatedly called for faster BOJ rate increases, reflecting Washington’s concern that slower monetary tightening could limit efforts to address inflation.

A month later, the BOJ raised interest rates to a 31-year high of 1% as part of its monetary policy normalisation. However, deeply negative real borrowing costs meant the move did not provide lasting support for the yen.

The US Treasury did not respond to requests for comment outside Washington office hours, while Japan’s finance ministry declined to comment.

Tokyo changes approach as yen hits four-decade low

With the yen reaching a four-decade low this year, Japan’s Vice Finance Minister Atsushi Mimura shifted away from frequent public warnings against speculators and focused instead on behind-the-scenes discussions with US counterparts, according to two sources familiar with the preparations.

The approach allowed Tokyo to keep markets uncertain over when intervention might occur.

Mimura maintained a low public profile even as Katayama and Bessent held an online discussion in late June on financial market developments.

Pressure for action increased in July after concerns over Takaichi’s expansionary fiscal and monetary stance pushed the yen towards further lows.

The weaker currency raised import costs and added pressure on the government’s approval ratings.

At the same time, the US administration was dealing with higher inflation and Treasury yields, strengthening its interest in supporting Tokyo’s efforts to counter currency pressure.

The US Treasury’s semi-annual currency report on July 24 reflected Japan’s concerns over excessive yen volatility and pledged to continue “close consultations” with Tokyo on exchange-rate matters.

Intervention coincides with BOJ meeting

Japan’s intervention campaign was closely coordinated with the BOJ, according to people familiar with the matter.

Using a speakerphone connected with several officials from the finance ministry’s foreign-exchange division, Mimura approved yen purchases against the dollar late on July 30.

The move came outside Tokyo trading hours and during the BOJ’s two-day policy meeting.

The yen immediately strengthened to 157.80 per dollar from around 162.80.

When an official informed Mimura that the yen was weakening again towards 158, he replied: “Yes. Let’s congregate tomorrow.”

Shortly after BOJ Governor Kazuo Ueda’s press conference ended on Friday, the yen surged again, with markets suspecting another round of intervention by Tokyo.

This time, Washington was also involved.

The US Treasury informed several banks that it might intervene in the yen market and instructed them to “stand ready for future action”, according to a source.

A Reuters photograph showed Bessent carrying a notepad during a Friday cabinet meeting with the words “To Do”, followed by “Buy Japanese Yen (JPY) $5-10 bil”.

Markets watch for September rate decision

The BOJ’s guidance on future monetary policy last week was its most hawkish to date, including a reference to the US Treasury’s currency report that “monetary normalisation would help reduce excessive exchange rate volatility”.

Reading from a prepared statement, Ueda stressed the need for vigilance “more than ever” against rising price risks.

Analysts interpreted the remarks as a strong indication that the BOJ could raise rates at its September meeting.

Bessent welcomed Japan’s approach.

“We strongly support Japan’s decisive market and monetary steps to correct the substantial undervaluation of the yen,” he said in a post on X on Sunday, while again supporting higher BOJ rates.

Mimura said the government would align its currency policy with BOJ monetary policy to address yen weakness, suggesting the possibility of further rate increases.

Bessent separately said he would meet Ueda at a US-hosted G20 finance leaders’ meeting in late August, ahead of the BOJ’s next policy meeting on September 17-18.

Markets are now closely watching the September meeting.

“Given Japan moved to prevent yen falls with the cooperation of the US, there’s a question of whether the BOJ can afford to forgo raising rates in September,” said Yuki Kimura, a bond strategist at Okasan Securities.

Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said a September rate hike appeared increasingly likely.

“Intervention only has a temporary effect in slowing currency moves. Faster rate hikes are probably needed to put a lasting floor on the yen,” she said.

“I feel like a September rate hike is a done deal. It won’t make sense for the BOJ to wait until October and cause another bout of yen declines.”

Source: Reuters