The United States recently intervened to support the Japanese yen, a highly unusual move as countries rarely intervene in other nations' currencies. This intervention saw the dollar fall from ¥164 to about ¥155. This action by the US Treasury, working alongside Japan's finance ministry, was a direct response to the yen reaching its weakest level against the dollar in 40 years, with Japan's prior interventions proving ineffective. The US aims to prevent Japan from potentially selling its substantial holdings of US government bonds, which could exacerbate existing weaknesses in the US bond market. Officials have indicated readiness for further intervention if necessary, sending a clear message to the market that challenging the yen would mean challenging both Japan and the US.
This intervention underscores a growing unease within the US regarding its own financial stability, particularly the US Treasury market. Foreign ownership of US government debt has significantly declined from nearly 60% around 2008-2010 to an anticipated 35% to 40% by 2025. This reduced foreign appetite, coupled with a massive supply of new debt to finance a growing budget deficit, is pushing up borrowing costs. Long-term rates are climbing, with 30-year Treasury yields above 5% and 10-year yields approaching that level, leading to debt-service costs that now exceed the US military budget.
The scale of the problem is substantial; outstanding Treasuries are projected to reach approximately $30.7 trillion by the end of 2025, or about 95% of US GDP. Japan, historically the largest foreign holder of US debt, has also reduced its holdings. This shift in demand, along with a lack of fiscal discipline and fragile inflation expectations, creates a challenging environment. The US Treasury Secretary, Scott Bessent, is navigating a delicate balancing act, aiming to stabilize Japan without triggering a sell-off in the US bond market. The intervention in the yen, while effective in the short term, is seen as a temporary measure that doesn't address the deeper structural issues in the US Treasury market.
The intervention also highlights a broader shift in market perception. While traditional macro factors like Treasury yields and Fed expectations usually drive the dollar, this intervention temporarily outweighed them, leading to a significant drop in the Dollar Index. The direct intervention in USD/JPY had a broader impact, encouraging investors to reduce long dollar positions across the foreign exchange market. The fact that intervention was a joint effort with the US, and not just Japan, changed the risk-reward calculus for traders, suggesting that governments are prepared to act again, thereby influencing prices even without daily intervention.
