Will the Japan intervene in the yen?

Late last week, Katayama cited an agreement between herself and US Treasury Secretary Bessent which gives Japan the right to intervene if currency markets become unruly. The accord does not state that the US would help with intervention, and expectations are low that it will. But, without it, intervention may do little more than buy Japan a bit more time.

Of course, the US administration is not averse to currency intervention. But its recent foray into Argentina, to aid the pressurised peso was a politically motivated move to get Argentinian President Milei over the line in elections. That’s very different from the situation in Japan, even though it does look as if there will be elections soon. The US is not going to intervene in the yen to try to help the LDP-led government through the elections.

More than this, the US now has a very long history of avoiding currency intervention. That’s arguably a shame for Japan as having the US as an ally in currency intervention can be a great help. It reveals that there have essentially been only two major trends since floating rates began in the 1970s. The first was a near three-fold rise in the yen through to the mid-1990s. The second has been an unwinding of all of this strength over the subsequent thirty years, which continues today. Why the turnaround in the mid-1990s?

Steven Barrow, Head of Standard Bank G10 Strategy, can point to a number of factors, not least the bursting of the Japanese stock and housing bubbles in the early 1990s which ushered in a period of economic distress for the country. But the other thing that marks the mid-1990s out is that Japan implored the US to join it in intervention to weaken the yen. The US, under former treasury secretary Robert Rubin duly obliged, and the rest, as they say, is history.

Could the end of this 30-year downtrend in the yen be ended by intervention, even if the US Treasury is willing to go along? That’s debatable. For a start, the turnaround in the yen in the mid-1990s coincided with the adoption of the so-called “strong dollar” policy by Rubin. That policy persists today, although, in a practical sense, it is hard to know what it stands for. Back in the mid-1990s it stood for US action to lift the dollar through intervention, and a good chunk of this intervention went the yen’s way.

Fast forward to today, and it seems very unlikely that Treasury Secretary Bessent, who has defended the strong dollar policy, will do anything that gives a sense that the policy has been abandoned—such as selling dollars against the yen in joint intervention with Japan. He presumably realises that, at a time when debasement of the dollar has been a concern in the market, a decision now to deliberately weaken the dollar risks fanning the flames of this debasement talk.

In short, there’s not going to be some sort of wholesale volte-face on the strong dollar policy. But does that rule out any possibility of US support? Steven Barrow does not think so. But he also believes that US help would only be forthcoming if it is in the US’s best interests. For instance, if the plunging yen were to really infect the Japanese bond market it is likely that a rout here could turn into a rout everywhere, including treasuries.

As we’ve argued recently, the debasement in Japan has been felt in this enormous multi-year fall in the yen; not in the bond market. As long as it stays in the yen we doubt that it will be of huge concern to US policymakers. But if JJGB yields start to gallop higher, perhaps because yen weakness fans major inflation concerns, then this would be a much greater source of concern for the US which, after all, is seeing its debt dynamics head in the same direction as Japan’s. The way the US could help to put out any such fire in the JGB market would be through intervention in the FX market. Hence, US intervention might not be as far-fetched as we might think, although that’s because of risks to the JGB market more so than risks to the yen.