Intervention is Self-Rescue: US Treasury Secretary Defends Yen Support, Cites Risk to US Rates

U.S. Treasury Secretary Janet Yellen has defended the joint intervention with Japan aimed at bolstering the yen, asserting that the currency's extreme fluctuations pose a significant risk to the U.S. economy. Yellen explained that the disorderly depreciation of the yen could lead to higher interest rates in the United States, thereby increasing borrowing costs for American households and businesses.

In a letter to Democratic Senator Elizabeth Warren, Yellen stated that the yen's disorderly market conditions could trigger forced liquidations, disrupting global markets and ultimately driving up borrowing costs. She confirmed that the intervention, which occurred in late July, utilized existing foreign currency assets from the Exchange Stabilization Fund (ESF) to support the yen. While the exact amount of funds deployed by the U.S. was not disclosed, Yellen hinted that the Treasury sold euros to purchase yen.

Japan subsequently announced it had spent $96.4 billion over the past month to curb the yen's decline. Observers had previously linked Yellen's actions to efforts to prevent U.S. Treasury yields from rising, given Japan's position as the largest holder of U.S. government debt. Senator Warren had requested an analysis of the ESF's use in this operation.

Yellen clarified that the Treasury's actions complied with ESF regulations, which authorize foreign exchange transactions with presidential approval to maintain orderly exchange arrangements. She emphasized that no credit was extended to Japan and that Japan owes the Treasury no debt, thus eliminating any risk of default. Despite the intervention, the yen has since retraced some of its gains, falling below 160 yen per dollar on Friday for the first time since the intervention.