US-Japan joint intervention in yen exchange rate: An exercise in short-termism

Editor's note: Yin Xiaopeng is a professor at the Research Institute for Global Value Chains, University of International Business and Economics. The article reflects the author's opinions and not necessarily the views of CGTN.

On July 31, 2026, Japan's Ministry of Finance and the US Department of the Treasury coordinated purchases of the Japanese yen. Japan's Ministry of Finance officially confirmed the move on August 3, saying it was aimed at addressing excessive volatility and disorderly movements in the yen in recent months. It also said further coordinated intervention could not be ruled out. Japan additionally indicated that it planned to make use of the Federal Reserve's Foreign and International Monetary Authorities Repo Facility, or FIMA Repo Facility, in the future. This marked the first coordinated yen-buying intervention by the US and Japan since 1998.

In the short term, the joint intervention quickly shifted market expectations. The yen strengthened from nearly 164 per dollar, its weakest level in almost 40 years, to around 155.20 per dollar on August 3. But the yen did not continue to strengthen in a sustained, one-way move. By August 10, the dollar-yen rate had climbed back above 158, suggesting that the boost from the joint intervention was already losing momentum. This shows that the latest intervention was more like an emergency brake, aimed primarily at curbing disorderly depreciation and deterring speculative trading, rather than fundamentally reversing the yen's trend.

The US participation in the intervention was driven not simply by its obligations to an ally, but by a combination of factors including strategic security, financial stability and trade competition.

First, Japan plays an important role in the US' regional strategy. 

Whether within the US-Japan alliance and the Quadrilateral Security Dialogue (Quad) framework, or in terms of regional security and economic cooperation arrangements in East Asia, Japan plays an important role and provides military and economic support for the US-led regional security architecture. In particular, as the US intensifies its strategic competition with China and efforts to maintain its regional leverage, a serious deterioration in Japan's economic stability caused by disorderly yen depreciation, rising import costs and mounting fiscal and financial pressures would weaken its ability to serve as a strategic pillar in East Asia. Maintaining the basic stability of the yen and the Japanese economy is therefore also in the US interest in keeping its alliance system functioning and sustaining its strategic posture in East Asia.

Second, the US needs to prevent Japan from selling large amounts of US Treasury securities to raise dollars. 

If Japan wants to buy yen directly, it first needs to obtain dollar liquidity. Selling its holdings of US Treasuries is one traditional way to do so. According to US Treasury data, Japan held about $1.1431 trillion in US Treasury securities as of the end of May 2026, making it the largest foreign holder of US government debt. If Japan were to sell Treasuries on a large scale to stabilize the yen, it could push down Treasury prices and drive up yields, thereby raising financing costs for the US government and the broader economy. Therefore, the US participation in the joint intervention, together with its push for Japan to use the FIMA Repo Facility, essentially reflects a preference for Japan to use its Treasury holdings as collateral to obtain dollars rather than sell the securities directly in the market.

Third, an excessively undervalued yen could strengthen the price competitiveness of Japanese exports in dollar terms, raising concerns in the United States over trade competition and pressure on its domestic industries. Supporting yen stability, therefore, serves not only to help Japan deal with disorderly currency movements, but also to protect the US alliance system, Treasury market stability and American trade interests.

From Japan's perspective, the root of its current predicament is that yen depreciation is no longer as effective as it once was in stimulating exports.

Since Japan's economic takeoff in the 1960s, the country has had a distinct export-oriented economic model. Japan's domestic market is relatively limited, and competitive products such as automobiles, home appliances and electronics have often had to rely on overseas markets in Europe and North America for large-scale expansion after initial commercialization at home. Japan's experience shows that even when an economy grows into a major economic power, it may not necessarily be able to free itself from dependence on exports. The key question is whether its domestic market is large enough to absorb the supply capacity generated by its industrial system.

For a long period in the past, yen depreciation brought more benefits than costs to Japan. A weaker yen could lower the relative prices of Japanese goods in international markets and thereby support exports. The Bank of Japan's long-standing accommodative monetary policy and efforts to prevent excessive yen appreciation were also closely linked to this export-oriented growth model.

But that mechanism is now malfunctioning. As the relative competitiveness of Japan's traditional industries has declined, yen depreciation has become less capable of generating a comparable increase in exports. At the same time, Japan remains highly dependent on imports of energy, food and raw materials. A weaker yen directly raises import costs, fuels imported inflation and erodes household purchasing power. In other words, the yen depreciation once primarily translated into an export dividend, but is increasingly becoming an import-cost burden. Japan's current exchange-rate predicament is not simply the result of speculative capital. It also reflects deeper factors, including declining confidence in fiscal and monetary policies, sustained capital outflows and changes in industrial competitiveness.

Japan's policy adjustments are also constrained by its high level of public debt. Since the 1990s, Japan has relied heavily on fiscal policy to cope with a prolonged economic slowdown. When interest rates fell to near zero and even into negative territory, the scope for further monetary easing became severely constrained, resulting in a classic liquidity trap. Although the Bank of Japan has begun normalizing monetary policy in recent years, high government debt still limits the scope for rapid and substantial rate hikes. The International Monetary Fund estimates that Japan's general government gross debt will be about 203% of its GDP in 2026. As low-interest debt is gradually refinanced at higher rates, the Japanese government's interest payments could double between 2025 and 2031.

Most Japanese government debt is held by domestic investors, providing a certain buffer for debt rollover and reducing the likelihood of a sovereign debt crisis in the short term. But the higher the debt ratio, the greater the impact of rising interest rates on government interest payments and financing costs. Japan therefore cannot simply rely on aggressive rate hikes to support the yen. Doing so could stabilize the exchange rate while triggering a chain reaction of pressures in the government bond market and on fiscal sustainability.

The direct amount of funds involved in the latest joint intervention is also not the decisive factor. Media reports showed that US Treasury Secretary Scott Bessent carried a note at a Cabinet meeting on July 31 reading, "Buy Japanese Yen (JPY) $5-10 billion." The note does not prove that the full amount was actually purchased, but it sent a clear signal to the market that the United States might intervene directly.

Compared with the enormous scale of the global foreign-exchange market, direct purchases worth billions or even tens of billions of dollars are insufficient to change exchange-rate trends over the long term. The more important role of intervention is to alter the expectations of speculators. Shorting the yen would no longer mean taking on only Japan's Ministry of Finance and the Bank of Japan, but potentially also the US Treasury and the Federal Reserve Bank of New York. Some speculators therefore closed their short positions, further pushing up the yen and triggering a rapid rebound over a short period.

But speculative capital will not leave the market permanently because of a single intervention. If the US-Japan interest-rate differential, Japan's fiscal pressures, energy import costs and economic growth prospects remain fundamentally unchanged, markets will resume testing the Japanese government's policy tolerance after a brief period of caution. The dollar's rise back above 158 yen on August 10 is precisely a reflection of this logic.

Exchange rates are determined by market supply, demand and expectations in the short term, but by economic fundamentals in the long term. From the 1980s through the 1990s, Japan's economy and export competitiveness were strong. Even when Japanese policymakers sought to curb excessive yen appreciation, the currency remained strong for an extended period. The situation is different nowadays. Japan has yet to develop a new growth engine capable of replacing its traditional competitive industries. The stimulative effect of yen depreciation on exports has weakened, while structural pressures from higher import costs, fiscal burdens and population aging continue to accumulate.

Therefore, the US-Japan joint intervention can temporarily stem the yen's one-way decline, force speculative investors to reduce short positions, and buy the Bank of Japan time to adjust monetary policy and the Japanese government time to rebuild market confidence in its fiscal sustainability. But as long as Japan's economic fundamentals and the US-Japan interest-rate differential do not improve significantly, the joint intervention is unlikely to drive a sustained reversal in the yen. What ultimately determines the yen's medium- to long-term trajectory is not how many yen are purchased in a single intervention, but whether Japan can rebuild its industrial competitiveness and economic growth momentum, gradually normalize monetary policy without destabilizing the government bond market, and restore market confidence in its fiscal policy.

In this sense, the latest US-Japan joint intervention carries three layers of significance: exchange-rate stabilization, alliance maintenance and financial risk containment. It can alter the slope of the yen's decline, but it is unlikely by itself to change the yen's underlying trend. Unless Japan succeeds in developing new sources of growth, the yen could come under renewed pressure after its short-term rebound.