US President Donald Trump. [AP]
US President Donald Trump. [AP]

The Trump administration's decision to join Japan in a rare joint currency intervention to defend the yen — the first such move in 28 years — was driven by a calculated effort to prevent a surge in US Treasury yields and protect Japan's pledged investment in the United States, analysts said.

The Wall Street Journal reported Monday that the weakness of the Japanese currency had become "not just Tokyo's problem but Washington's as well," and analyzed the unusual circumstances that led the US to step in to defend the yen.

The US and Japan jointly intervened in currency markets on July 31, buying yen and selling dollars. US Treasury Secretary Scott Bessent and Japanese Finance Minister Satsuki Katayama officially confirmed the move and said further joint intervention remained an option if needed. It was the first time the two countries had jointly intervened to arrest yen weakness since 1998, during the Asian financial crisis.

The Wall Street Journal identified the risk of a yen carry trade unwind as the primary driver.

The yen carry trade involves borrowing in Japan, where interest rates are low, and investing the proceeds in higher-yielding assets such as US Treasuries and shares. A weaker yen amplifies returns, but a sharp yen reversal — or a rise in Japanese interest rates — can trigger a sudden mass unwinding as investors rush to close their positions.

Such an unwind would flood markets with selling of US Treasuries and equities, driving bond yields sharply higher and amplifying volatility across global financial markets.

In August 2024, when the Bank of Japan raised interest rates, fears of a yen carry trade unwind spread rapidly: Japan's Nikkei 225 index plunged 12 percent in a single day, the S&P 500 fell 3 percent, and the yield on the 10-year US Treasury surged 20 basis points over three days, rattling global markets.

Paul Cavey, head of consultancy East Asia Econ, told the Wall Street Journal that the US "would have been worried about the risk that sharp yen moves could damage global financial stability."

The Trump administration also had strong political reasons to keep US Treasury yields in check.

In the United States, rising Treasury yields push up mortgage rates — a burden the administration can ill afford ahead of the November midterm elections. The yield on the 30-year US Treasury climbed to 5.28 percent at the end of last month, its highest level since 2007.

Preventing Japan from selling large volumes of US Treasuries to fund its own currency intervention was another key consideration.

Japan is one of the world's largest holders of US government bonds. A large-scale Japanese sell-off of Treasuries to defend the yen would have pushed already-elevated yields even higher.

Appearing mindful of this concern, Finance Minister Katayama said Japan would use the Federal Reserve's collateralized lending facility to raise dollars for future currency intervention rather than selling US Treasuries.

The Wall Street Journal also cited Japanese corporate investment in the United States as a factor behind the joint intervention.

The Japanese government pledged $550 billion in US investment during trade negotiations with the Trump administration last year. An excessively weak yen, however, would raise the dollar-denominated cost of that investment for Japanese companies, potentially derailing those plans.

Trump's longstanding preference for a weaker dollar also shaped the decision. He has repeatedly said an overly strong dollar is undesirable if the United States is to reduce its trade deficit and bring manufacturing back home.

The Wall Street Journal estimated that Japan deployed around $50 billion in its recent currency market intervention. Following the joint action, the dollar-yen rate fell to the 156-yen range during trading, easing what had been a roughly 40-year low for the yen.


sjy@heraldcorp.com