As the U.S. relationship with some traditional allies fractured during the second Trump administration, ties with Tokyo have only improved. Now, after they launched a coordinated intervention to strengthen the yen, the alliance seems to explicitly include backing for the Japanese currency.
“This intervention was a sign of friendship,” U.S. President Donald Trump told reporters on Sunday. “Japan has always been very good to us — with the exception of course of Pearl Harbor.” Raising the 1941 surprise attack seems to be his favorite Japan joke; it caused Prime Minister Sanae Takaichi to squirm during a visit in the Oval Office earlier this year.
But she won’t be too concerned about the optics if the U.S. delivers what she wants. The entry of the U.S. into Tokyo’s attempts to strengthen the yen decidedly changes the game.
Having Washington on board brings important potential benefits — and no small amount of danger. The pluses, accruing mostly to Japan, bolster efforts to push the yen into firmer territory, adding financial firepower and big psychological advantages. Yen bears are now up against the world’s pre-eminent financial power and the issuer of the global reserve currency. And from Treasury Secretary Scott Bessent’s hilariously staged to-do list leaked from Camp David featuring just one item, “Buy Japanese Yen (JPY) $5-10 bil.” to reportedly selling euros and not dollars to boost the yen, the approach is intriguing tactically, too.
Most interesting is the use of the Foreign and International Monetary Authorities Repo Facility, a COVID-19-era measure that lets central banks use their Treasury holdings as collateral to access dollars. This opens the door for Japan to weaponize some of its $1.1 trillion in Treasuries to defend the yen without disrupting the U.S. bond market. Bessent explicitly endorsed the facility’s utilization and expansion.
Don’t underestimate the advantage Japan has in a Treasury secretary who understands the country — and who helped make a small fortune taking the other side of this currency move more than a decade ago. Bessent has been thinking about the U.S. joining intervention efforts since at least January, the Nikkei reported. And he endorses Takaichi’s pro-growth economic policies.
The yen’s recent weakness rests on assumptions about Japan and Takaichi that are “heavily based on vibes about policy direction” rather than economic reality, says Brad Setser, a former U.S. Treasury economist now at the Council on Foreign Relations.
That reality includes a record-high six consecutive years of tax revenue. Takaichi is set to preside over a return to a primary budget surplus for the first time in nearly three decades. Japan’s net debt position is far lower than most peers. The yield gap with the U.S., long blamed for the yen’s weakness, has fallen to its lowest since 2022.
There are also minuses, starting with whether the U.S. intervenes to sell dollars, the trade that really matters. It worked in 1998, the last time the two countries joined forces to strengthen the yen. The size of the FX market then was much smaller, around $1 trillion a day; it’s now around $9.6 trillion. The U.S. spent around $830 million, a relative pittance versus Bessent’s note.
If it’s true that the U.S. sold euros last week to finance this move, what might the European Central Bank and EU finance ministers make of it? For Japan, there are other risks. Now the U.S. has more skin in the game, Bessent will likely feel justified to put more pressure on the Bank of Japan to raise rates, something he has already done.
It’s harder to see what the U.S. gets out of this. It’s always good to help out a close ally, and Japan is about as close as they come. Bessent says he doesn’t like “volatility,” but no finance minister does. In 1998, during the Asian financial crisis, the U.S. worried that an unchecked yen slide would prompt China to devalue and set off a new phase of market routs. The last thing the U.S. wanted was the FX drama to overshadow a trip by President Bill Clinton to China.
The biggest concern now is what happens to both nations’ credibility if all this fails to really put a lid on the yen. We’ve previously argued that the currency is in need of a new narrative to stop weakness begetting further weakness. It was a surprise that even an attempt to enlist the country’s massive pension funds failed to boost it much. The Trump administration’s willingness to smash taboos has sometimes proven useful; at other times, a reminder why they existed in the first place. And then there are the issues of attention span and staying power.
Past joint interventions have often marked turning points, visible only in hindsight. When traders next test the currency, they’ll find out whether “Buy Japanese Yen” remains on Washington’s to-do list.
Gearoid Reidy and Daniel Moss are Bloomberg Opinion columnists.
