US intervenes to support Japan's struggling yen in rare joint action

The United States' decision to intervene alongside Japan in supporting the yen marks a significant moment, reflecting the deep financial ties between Washington and Tokyo. This rare move aims to halt the decline of one of the world's most heavily traded currencies, which had approached its weakest level against the dollar in approximately four decades.

The coordinated intervention on July 31 helped the yen appreciate by about 5%, recovering from nearly 164 yen per dollar to around 155. However, by August 11, the yen had fallen back to approximately 159.36 per dollar, erasing about half of its gains. Japanese financial data suggests Tokyo may have spent as much as $58.97 billion on the intervention.

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Coordinated intervention is likely to exert more persistent upward pressure on the yen than unilateral Japanese intervention, because US participation sends a stronger signal that the yen is substantially undervalued.

According to reports, the US Treasury, acting through the Federal Reserve Bank of New York, purchased yen using euros rather than directly selling dollars. This strategy allowed the US to support the Japanese currency without creating the perception of a broader policy to deliberately weaken the dollar. Sayuri Shirai, an economics professor at Keio University and former Bank of Japan Policy Board member, noted that coordinated intervention sends a stronger signal than unilateral action by Japan, indicating the yen is substantially undervalued.

US participation in currency interventions has been uncommon since the mid-1990s, making this decision particularly noteworthy. The yen's weakness is structural, exacerbated by factors like increased energy costs due to the Iran war, which has also strengthened demand for the dollar. This situation also renews scrutiny on Japan's holdings of over $1 trillion in US government debt.

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Media reports suggest that the US Treasury intervened through the New York Fed [Federal Reserve Bank of New York] by selling euros and buying yen, rather than selling dollars directly. This may have been intended to support the yen without creating the impression that the United States had begun a broader policy of weakening the dollar.