The United States has joined forces with Japan to strengthen the yen. This move is the first of its kind in nearly three decades and has provided a temporary lift for the currency. However, financial experts warn that the long-term outlook remains difficult.
The dollar weakened considerably against the yen after U.S. President Donald Trump and Japanese Finance Minister Satsuki Katayama confirmed their collaboration. Trading closed with the dollar at around 156 yen, down from the highs of over 163 yen in July. This was the first joint intervention since the 1998 Asian Financial Crisis.
U.S. Treasury Secretary Scott Bessent stated that both nations will keep close contact regarding the issue. He assured that Washington would not hesitate to partake in further interventions if needed. Newsweek has reached out to the Bank of Japan for comments on the matter.
Why the Yen Needed Support
The yen’s decline is mainly due to the higher interest rates in the United States compared to Japan, making the dollar more appealing. A weaker yen enhances the cost of imports, causing inflation and raising living expenses in Japan. Although the weakened currency has attracted tourists to Japan, it has led to increased import prices.
Exacerbating the issue, the U.S.-Iran war adds complexity, as Japan relies heavily on imports of crude oil through the Strait of Hormuz. Fuel prices in Japan have been managed at about 170 yen per liter, but authorities may consider increasing this cap, according to Kyodo news agency.
Benefits for Japan
President Trump praised the U.S.’s strong relationship with Japan, stating that intervention signals friendship benefiting both economies. Analysts suggest Trump views Japan as an essential ally in counteracting China and advancing the U.S. economic objectives, including decreasing the trade deficit.
Japan was the first major economy to agree to a strategic trade and investment framework after the U.S. imposed extensive tariffs globally. This framework commits to up to $550 billion in U.S. investments. Supporting the yen lessens the yen-based cost for Japan to fulfill these commitments.
Additionally, the timing is significant for Japan’s leadership, with PM Takaichi facing declining approval ratings amidst dissatisfaction with rising living costs.
Benefits for the U.S.
The U.S.’s action also stems from its interests in the Treasury market, where Japan is a significant foreign holder. Former Goldman Sachs analyst Nic Puckrin notes that selling U.S. Treasuries could further hike yields, raising borrowing costs.
Although the intervention provides temporary relief, the interest rate gap between the U.S. and Japan persists. The yen carry trade remains appealing, and substantial interest rate rises in Japan would be required to compete with U.S. rates. Analysts highlight that this measure offers temporary respite rather than a permanent solution.
Can the Yen Sustain Its Gains?
Tokyo’s previous $70 billion investment to boost the yen showed limited success. The joint effort with the U.S. offers more potential stability. It lowers the risk of a sharp yen drop and provides the Bank of Japan with time to evaluate economic conditions influenced by geopolitical conflicts and past rate hikes.
Despite these efforts, Oxford Economics’ Shigeto Nagai predicts continued weakness for the yen through year’s end, with gradual strengthening anticipated in the coming years as Japan increases rates, while the Federal Reserve eases them.
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