Why the US and Japan jointly intervened to support the yen

US and Japan intervened together last week to carry out a rare, coordinated yen buying to halt the slide of the Japanese currency. The yen slid to a fresh 40-year low, hitting 163.73 against the dollar before rebounding to around 157-158. It's the first joint intervention since the 2011 earthquake to weaken the yen and the first joint operation to buy yen since 1998. The US sold its own holdings of Euros from the US Treasury Exchange Stabilisation Fund to buy the yen.

“They have a weakening yen, and they wanted a little bit of help. And we’re always there for Japan,” said Trump in response to a reporter's question about joint intervention. After the announcement, the Japanese yen surged as much as 1.4 per cent to hit a nearly three-month high of 155.20 per US dollar, compounding a 3.8 per cent surge over the two previous sessions.

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Why its happening?

The interest rate gap between Japan and the US has been driving the persistent weakness of the yen, hitting Japanese households with rising import costs. This has been a driving force for almost three decades, from 1999 to 2024, of yen carry trade, where Wall Street hedge funds would borrow yen and convert it to dollar-based assets and gain 4-5 per cent interest. This was the easiest way to make money. However, that gradually depreciated the value of the yen. It reached a peak in 2024 when the US Federal Reserve hiked rates aggressively, and Japan maintained neutral and negative interest rates. In July 2024, the Bank of Japan raised rates to 0.25 per cent, causing a sudden unwinding of the carry trade.

The bigger worry for Washington and Tokyo is the bond market. Japan is the largest holder of US debt, roughly $1.15 trillion in US Treasuries. Analysts say the move aims to prevent spillovers from a sell-off in the yen and Japanese government bonds, which are adding pressure to already-rising US Treasury yields. US wants to prevent the weakening of the yen to prevent its trade deficit from widening. It does not want to risk Japan dumping US Treasuries, which will push the yields higher and widen its debt.

However, analysts suggest the US and Japan are kicking the can down the road; they can't address this crisis without monetary policy change and fiscal discipline. The Japanese Ministry of Finance and the Bank of Japan are in a structural trap. If the BOJ raises interest rates to 2-3 per cent to match the US, the interest cost of Japan's debt will explode. Japan's public debt is over 200 per cent of its GDP; it will push the country into a debt spiral and freeze the domestic market. The most recent adjustment in June 2026 by the BOJ pushed the interest rate up to 1.00 per cent. But it is still negative compared to inflation, which is running near 2.5- 3 per cent. So investors are heavily penalised for holding cash in yen, and it forces them to move it into foreign dollar-based assets, keeping the pressure on the yen. Japan needs the Fed to slash interest rates to stabilise its yen, but Washington is too scared to do that amid a global energy crisis. So the US is keeping the yen on life support to keep its own economy from going into a debt spiral.