The U.S. Treasury Department intervened in currency markets to support the Japanese yen by selling euros from its Exchange Stabilization Fund and using the proceeds to purchase yen. This marks the first coordinated U.S.-Japan operation to buy yen since 1998, and U.S. Treasury Secretary Scott Bessent stated that the action aimed to stabilize Asian markets and counter "disorderly yen movements." Bessent also assured European officials that the euro sale was merely a reallocation of reserves.
Washington's involvement was largely driven by concerns over Japan's potential need to sell large quantities of U.S. Treasuries to finance a unilateral intervention. Japan is the largest foreign holder of U.S. government debt, and a significant sell-off could destabilize U.S. funding markets. Analysts at State Street noted that the U.S. and Japan's emphasis on the Federal Reserve's Foreign and International Monetary Authorities (FIMA) Repo Facility signals Japan's ability to obtain dollar liquidity without selling Treasuries, thereby addressing these concerns. The FIMA facility allows foreign central banks to get dollar liquidity without outright selling Treasuries.
Beyond the yen's immediate stability, the U.S. intervention also aimed to prevent a persistently weak yen from triggering further selling in Japanese government bonds, which could lead to higher yields spilling into global bond markets. This is particularly relevant as both Japan and the U.S. are grappling with rising long-term borrowing costs. The U.S. 10-year Treasury yield had risen above 4.7% before the intervention. Stabilizing the yen could bolster the "carry trade," where investors borrow cheaply in yen to invest in higher-yielding assets like U.S. Treasuries, thus maintaining demand for U.S. government debt.
Treasury Secretary Bessent expressed a desire to see the FIMA facility "upsized" beyond its current per-counterpart limit of $60 billion per day, given Japan's approximately $1.1 trillion in U.S. Treasuries. He views facilities like FIMA and swap lines as tools to protect the U.S. economy and mitigate offshore volatility. While some analysts, like Robin Brooks of the Brookings Institution, questioned the mechanics of selling euros rather than dollars, arguing it could confuse markets, others, like Brad Setser, a former Treasury official, highlighted that current central bank swaps are typically for dollar lender-of-last-resort activities, not intervention.
