On July 31, the U.S. government took the unusual step of intervening directly in the currency markets. Not, as one might have guessed, to boost the dollar, but to prop up the Japanese yen.
Individual nations frequently attempt to bolster or weaken their own currencies, but participation by the United States is exceptionally rare. Not since the 1998 Asian financial crisis has the U.S. intervened directly to support the falling yen.
Given America’s preference for allowing markets to set exchange rates, why did we jump in now?
The Japanese yen has been under intense pressure, falling to 40-year low versus the dollar thanks to the government’s stubborn reluctance to raise interest rates, an aging population, declining workforce, and massive government debt. A weaker yen spells trouble domestically, since the island nation imports 90% of its energy and most of its raw materials. Since oil and many other commodities trade in dollars, the weak yen means higher prices for these imported goods.
Perpetually low policy interest rates in Japan have also facilitated a hedge fund strategy that reinforces the slide. Investors borrow yen at near zero interest after inflation, then sell their yen to buy dollar denominated assets with higher yields. The large volume of yen sales adds more downward pressure in a sort of feedback loop. This strategy, known as the “carry trade”, has resulted in a record level of bets against the yen in recent months and can wreak havoc in global markets if it reverses suddenly.
Defending a currency.
When a country’s sovereign currency is declining sharply, that nation may attempt to stem the decline by directing its central bank to buy its currency in the foreign exchange markets, hoping to stabilize the price.
Repeated yen purchases by the Bank pf Japan have failed to stem the slide, leading the U.S. Treasury Secretary Scott Bessent to take the rare step of buying yen directly. The Treasury reportedly sold some of its euro currency holdings to finance the purchase. The move, confirmed by Bessent in a Monday tweet on X, had a measurable if temporary effect, with the yen rising by 6% over the following 2 days.
Secretary Bessent, himself a former currency trader, has an interesting history with the yen. In 2013, he was on the other side of the trade, betting on a steep decline in the yen as the chief investment officer for financier George Soros. Bessent’s wager paid off handsomely, netting the firm $1 billion in profit. Fast forward to 2026 and the secretary is now engaged in a rescue effort to bolster the flagging Japanese currency.
Why the U.S. intervened.
The stated justification for the action was to “curb currency volatility and reduce risks to other Asian economies.” Certainly true. But the rationale for American intervention goes deeper and is a bit more complex.
Previous Japanese yen purchases were financed by liquidating other foreign currency holdings. But it became increasingly likely that Japan would be forced to sell some of its U.S. treasury bonds to pay for the next round. Japan is the single largest foreign creditor to the U.S., holding $1.1 trillion of our debt, roughly double the amount held by China. A significant sale of treasury bonds would likely drive U.S. interest rates higher at a most inopportune moment.
U.S. interest rates were already climbing due to inflation fears from the surge in energy prices, new tariff uncertainty, and spiraling federal deficits. The pressure intensified following the new Federal Reserve chairman’s recent press conference that sent mixed signals regarding the Fed’s commitment to its 2% inflation target. Yields on longer-dated treasury bonds climbed to the highest level in 19 years. A large Japanese bond sale would only have exacerbated the pressure and sent rates even higher.
Another factor was clearly the balance of trade. A weaker yen versus the dollar makes U.S. imports of Japanese goods like automobiles and electronics more affordable to Americans. A stronger dollar also hurts U.S. exports. Unusually for an American president, Mr. Trump has been a vocal advocate for weakening the dollar as a part of his overall trade strategy.
It is also personal: President Trump likes the Japanese leader.
Prime Minister Sanae Takaichi has cultivated a cordial relationship with the President from early on, taking a page from her late mentor former Prime Minister Shinzo Abe’s playbook. Abe courted Trump and the two became friends and golfing buddies before Abe’s assassination in 2022. New Japanese leader Takaichi welcomed the American president to Tokyo in 2025 with panegyrics and gifts, including Abe’s putter, a gold-encrusted golf ball, and a pledge to nominate President Trump for the Nobel Prize. The two have maintained a cordial relationship that helped convince the President to lend a hand.
Speaking with reporters on Air Force One last weekend, the President said “they wanted a little bit of help, and we’re always there for Japan…More than anything else, it was a signal of friendship.”
“Japan’s always been very good to us — with the exception of course of Pearl Harbor.” Ow.
In addition to the direct yen purchases, Secretary Bessent is pressing the Federal Reserve to expand a covid-era lending program to allow Japan to buy more yen on credit. The Foreign and International Monetary Authorities (FIMA) facility allows Japan to borrow up to $60 billion from the Fed by posting treasury bonds as collateral. Mr. Bessent is urging the Fed chair to significantly expand the credit limit in another effort to avoid further pressure on U.S. interest rates.
Will it work?
Like most short-term fixes, currency interventions rarely have a lasting impact since market driven foreign exchange rates are determined by economic fundamentals. For the yen to find a more stable footing, the Japanese government must begin raising interest rates to stem the outflow of capital that is pressuring the yen and provide a sign that it is serious about its debt problem. U.S. intervention may have provided a respite but only a temporary one for Japan and for American borrowers.