The United States Treasury and the Bank of Japan worked together to intervene in currency markets last month in a bid to stabilize the yen, which had fallen to a 40-year low against the U.S. dollar. The action marked the first intervention by the U.S. to support the yen since June 1998, and came as a surprise to central banks around the world, who were not given advance warning. Why is the yen so important, what could happen if its value falls and what does it mean for Canada? The Financial Post explains.
What happened?
The Bank of Japan and the U.S. Treasury worked together to intervene in the yen on July 31, a move that Treasury Secretary Scott Bessent said was needed to counter “disorderly yen movements.”
The joint intervention came after the yen dropped to 164 yen per U.S. dollar, a level not seen since the 1980s. The yen was down by more than 11 per cent against the U.S. dollar over the past 12 months at the time of the intervention, but has since recovered some of that ground.
“We will not hesitate to participate in further joint intervention,” Bessent said in a tweet on Aug. 2. “We strongly support Japan’s decisive market and monetary steps to correct the substantial undervaluation of the yen.”
It is unclear how much yen the U.S. Treasury bought, but an image of a notepad belonging to Bessent suggested he planned to buy US$5-billion to US$10-billion worth of the currency.
In a twist that blindsided the European Central Bank, Treasury officials sold euros rather than dollars in exchange for yen.
“The way to make US$1 purchase less yen is to keep buying yen until that price goes up, but all sales are sales, and you could sell something else and then buy yen,” said Vikram Rai, a senior economist for TD Economics. “That was what the U.S. was able to do. They didn’t communicate that they were pursuing a weak dollar, but we do think that was likely part of it.”
Economists said the U.S. government’s intervention was unique and unusual.
“There is a fairly long history of coordinated interventions and they were quite effective because they signalled to the markets that there was a global unified attempt by central banks to move currencies in a particular direction,” said Michael Devereux, an economics professor at the University of British Columbia who specializes in international finance. “This was a bilateral action and it was taken by the U.S. without communicating to any of the other central banks.”
Why did the U.S. government step in?
It isn’t clear why the U.S. decided to intervene at this point in time. Many observers theorize the U.S. stepped in to ensure the Japanese government wouldn’t dump U.S. Treasury bonds if it moved unilaterally to stabilize its currency.
Japan is one of the largest holders of U.S. government bonds, owning roughly $1.14-trillion worth, according to the latest U.S. government data .
If Japanese officials sold a large amount of these bonds, it would put downward pressure on bond prices and upward pressure on U.S. interest rates.
“(Japanese officials) were using the proceeds of these sales to purchase yen in some form, likely Japanese government bonds, and that would reduce yields in Japan in the short term,” Rai said.
A weaker yen would also threaten to make Japanese exports cheaper in the U.S. and U.S. exports more expensive in Japan, which would have a negative effect on the U.S. trade balance with Japan.
It would also impede the Trump administration’s global tariff strategy, which aims to reduce the U.S. trade deficit and pressure nations into changing trade or border policies.
“That’s a reason why the U.S. government may want to prevent the fall in currencies,” Devereux said.
On Aug. 3, U.S. President Donald Trump shed little light when asked about the intervention. “Japan’s been very good to us, with the exception, of course, of Pearl Harbor,” the president told reporters.
What could happen if the yen falls?
A weaker yen could lead to higher inflation in Japan, which imports most of its energy, food and industrial inputs in U.S. dollars. Paying more for imports would raise costs for consumers and businesses and squeeze households, while reducing confidence in the Japanese economy.
That, in turn, could open the door to policy risk.
“If markets think yen weakness will force the Bank of Japan to raise rates faster, that can push up bond yields and make government financing more expensive. The risk is not just higher import prices; it is a broader confidence issue, where currency weakness, fiscal credibility and borrowing costs start reinforcing one another,” Rai said.
“Right now, the Bank of Japan is expected to raise interest rates later this year cautiously, not wanting to choke off the economy’s escape from a long period of near-zero inflation and nominal growth. More intense inflationary pressures from yen weakness could reduce their patience.”
Did the intervention work?
The yen’s value immediately rose following the joint intervention to a three-month high of roughly 155.23 yen per U.S. dollar, but it didn’t hold and was above 159 per U.S. dollar on Thursday.
“We can see now that about half of the effect of the intervention looks to be gone,” Rai said.
Devereux, meanwhile, noted that markets might believe the U.S. will follow through in supporting the yen.
“Interventions signal to markets that the central banks are prepared to defend the value of a currency, but the signalling effect is only useful if the threat is credible. It seems that (this intervention’s) credibility was lacking,” he said. “We also haven’t seen a coordinated global intervention where all central banks intervene to make it substantially more credible, and that undermines the effect as well, particularly because the ECB wasn’t involved.”
The yen carry trade — in which investors borrow yen at a lower interest rate and invest it in other currencies and assets offering higher yields — has also seen a partial unwind since the joint intervention, Rai said.
The carry trade depends on low Japanese interest rates and a stable yen exchange rate , and the recent intervention has added to volatility there.
“That said, the door hasn’t shut complete on the carry trade. There is still a wide gap between Japan and U.S. bond yields, so there is still some incentive to borrow yen and invest elsewhere, but the risks around that trade are higher now,” Rai said.
What are the implications for Canada?
Canada and Japan have trade relations and economic ties, but Rai said the impact of a weak yen likely wouldn’t be noticeable.
“What would be more significant for Canada is the impact on U.S. yields because we have tightly linked financial markets with the United States, and if U.S. borrowing costs rise, some of that tends to pass on to Canadian borrowing costs, and that would have a more direct impact,” he said.
Rai said this was unlikely to change things for Canadian investors, especially since U.S. Treasury yields are already top of mind. He said investors should still pay attention to what U.S. government officials are saying about the intervention.
“We don’t expect this to become a serial occurrence,” he said. “We think they’re buying time for the Bank of Japan’s policy meetings in the fall.”
• Email: ptran@postmedia.com
Why are the U.S. and Japan trying to prop up the yen and what does it mean for Canada?
2026-08-13 19:43:32
