US Treasury Secretary Scott Bessent has declared the yen's level problematic for Japan and other currencies, signaling a continued concern over its persistent weakness. This statement comes after a rare coordinated intervention by the US and Japan to prop up the yen, which had fallen to a 40-year low of nearly 164 yen per dollar. The intervention, involving the US Treasury selling euros to buy yen, helped the currency recover to just under 157 yen per dollar.
Bessent emphasized that the US is prepared for further joint interventions and is pushing for the Federal Reserve to expand its Foreign and International Monetary Authorities (FIMA) Repo Facility. This facility allows foreign central banks, like Japan's, to lend their US Treasuries for short periods to acquire dollar liquidity without having to sell them outright, thereby preventing disruption in the $29 trillion US Treasury market. Japan holds approximately $1.1 trillion in US Treasuries, and recent interventions by Japan alone were estimated to be in the range of $60 billion to $80 billion. An expanded FIMA facility would require a vote from the Federal Open Market Committee.
The Treasury Secretary has consistently voiced concerns about the impact of a weak yen and Japanese bond market instability on US Treasury yields. He closely monitors the 10-year Treasury yield, which had risen above 4.7% before the recent intervention. The intervention is also seen as a move to counter the "yen carry trade," where investors borrow in low-interest yen to invest in higher-yielding US assets, contributing to the yen's depreciation and potentially boosting demand for US Treasuries.
Analysts, including those from Mizuho Securities, interpret the coordinated intervention and US pressure as part of a broader strategy to encourage the Bank of Japan (BOJ) to raise interest rates. While the BOJ kept rates on hold last week, markets now anticipate a September rate hike with nearly a 50% probability, and a 90% chance by October. A BOJ rate hike would help support the yen and mitigate spillovers from Japanese government bonds into the US market. Japanese Finance Minister Satsuki Katayama also confirmed the joint intervention and expressed readiness for further action, underscoring the shared interest in stability.
