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🇰🇷 South Korea /Economy & Trade

US and Japan intervene to prop up yen, but deeper fiscal fears loom

From Hankyoreh · () Korean

Translated from Korean, summarized and contextualized by DistantNews.

At a glance

Analysis Named sources Context piece
  • The US and Japan jointly intervened in the foreign exchange market to prop up the Japanese yen, which had fallen to a 40-year low.
  • This intervention, the first in 28 years, aimed to prevent a regional currency crisis, with US Treasury Secretary Scott Bessent citing the 1997 Asian financial crisis as a precedent.
  • However, forex experts suggest the US may have had an ulterior motive: to prevent Japan from selling off its substantial holdings of US treasuries, which could destabilize the US bond market amid rising public debt.

The United States and Japan recently conducted a joint intervention in the foreign exchange market, a move not seen in 28 years, to support the Japanese yen. The yen had plummeted to a 40-year low against the dollar, prompting the coordinated effort to stabilize its value. The US Treasury Department, through the Federal Reserve Bank of New York, purchased yen using euros from the Exchange Stabilization Fund, while Japan's Ministry of Finance and the Bank of Japan deployed significant funds.

To do: Buy Japanese Yen (JPY) $5-10 bil.

— Scott BessentA note written by US Treasury Secretary Scott Bessent, visible at a Cabinet meeting.

US Treasury Secretary Scott Bessent justified the intervention by warning of potential "Asian currency dominoes" falling, drawing parallels to the 1997-1998 Asian financial crisis, which he stated was partly triggered by an overly weak yen. Bessent emphasized the importance of a stable yen for both the US and the broader region, noting concerns about volatility in the Korean won and the perceived undervaluation of the Chinese RMB.

Despite the official explanation, some foreign exchange experts propose an alternative motivation. They believe US Treasury officials were concerned about Japan potentially selling off its vast holdings of US treasuries to defend the yen. As Japan is the largest foreign holder of US treasuries, such a sale could significantly increase bond yields, exacerbating the US's already precarious fiscal position.

I think a stable yen is not only important for the US, but it’s very important for the entire region, because if the yen were to weaken substantially, then the other currencies would follow it.

— Scott BessentUS Treasury Secretary Scott Bessent's statement in an interview with CNBC.

The US faces a growing fiscal challenge, with public debt recently reaching $31.27 trillion, equivalent to 100.2% of GDP. Interest payments on this debt are projected to exceed $1 trillion this year alone. The intervention, therefore, might also be seen as a preemptive measure to protect the US bond market from further strain, particularly given Japan's use of the Federal Reserve's Repo Facility instead of selling treasuries.

We’d seen excess volatility in the Korean won. Many people believe that the Chinese RMB is undervalued.

— Scott BessentUS Treasury Secretary Scott Bessent's remarks on regional currency concerns.
DistantNews Editorial

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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