NYT: Here’s why the US is helping prop up the Japanese Yen

Japan has already spent around $160 billion trying to stop the yen's decline. US interventions have been ineffective.

Each time, the yen strengthens for only a few days, after which it begins to weaken again. The only effective response is to sharply and aggressively raise interest rates. But this would trigger a collapse of the economy, which has been living in a world of zero interest rates.

For the first time since 1998, the US and Japan have jointly supported the yen.

When the Japanese yen recently hit its weakest level against the U.S. dollar in about 40 years, it wasn’t just a problem for the government in Tokyo. It was also a problem for the United States, The New York Times writes.

The U.S. Treasury Department last week took a rare step to help prop up the yen, reinforcing the Japanese currency’s global significance and the trouble it can cause across borders. The United States and Japan share deep economic and financial ties. Japan’s large holdings of U.S. Treasuries, stocks and other assets — nearly $3 trillion in all — mean that turmoil in Japan can ripple through U.S. markets and beyond.

Here’s why what happens to the yen matters to the United States.

Tight financial ties

The U.S. intervention added financial heft to the effort of Japanese officials, who had already spent tens of billions of dollars this year trying to boost the yen. So far, Japan’s interventions have had limited effect and raised the prospect that Japan might sell significant portions of its large pile of U.S. Treasuries to fund further intervention. Japan is the largest foreign holder of U.S. Treasuries, with more than $1.1 trillion in holdings.

By selling Treasuries, Japan could push down their price — and that could ultimately raise borrowing costs for the U.S. government. Already, the yield on U.S. Treasuries have climbed in recent weeks on concerns about inflation. Last week, the yield on 30-year U.S. bonds hit their highest level since 2007.

Moves in the yen also influence other Asian currencies, such as the South Korean won. So supporting the yen can reduce the risk that other Asian countries would come under intense pressure and need to sell their own dollar reserves to prop up their currencies.

Critical trade flows

The flip side of a weak yen is a strong U.S. dollar, which can hurt American exporters by making their goods more expensive for foreign buyers. And that could give Japanese exporters a competitive advantage in the United States. Last year, the U.S. imported $146 billion worth of goods from Japan, and exported about $82 billion, according to data from the Office of the United States Trade Representative.

It’s not clear how effective the intervention in the yen will be, even with the help of the U.S. government. A fundamental reason the Japanese yen has sunk so much are investors’ concerns about Japan’s fiscal condition — a heavy debt load and the government’s promotion of tax cuts and spending. The country’s gross debt is more than twice the size of its economy, by far the largest debt burden of any major advanced economy.

Why has Trump stepped in to prop up Japan’s currency?

The US has bought up yen to strengthen the currency for the first time in almost 30 years, with the moves raising questions about America’s motives, The Guardian writes.

The US has launched a bid to prop up the value of the yen, marking an extraordinary coordinated intervention with Japan’s government to halt the currency’s fall as it approaches 40-year lows.

The first clues that the US would intervene came during a Trump administration cabinet meeting on Friday. US treasury secretary Scott Bessent was pictured with a note reading: “To Do. Buy Japanese Yen (JPY) $5-10 bil”.

“Japan’s been very good ‌to us, with the exception, of course, of Pearl Harbor,” Trump said on Sunday, as he confirmed that the treasury had bought billions of dollars’ worth of Japanese yen, the first time in 30 years that the US has stepped in to strengthen the currency in such a way.

The US president said the intervention would be “good for the world economy,” but some analysts are suggesting that the Trump administration is concerned that Japan’s efforts to buy up yen, raising the value of their currency, could hit the US economy by making government borrowing more expensive.

In order to free up the money to buy yen, Japan has been selling US government bonds – known as treasuries. Many countries own US bonds as a store of national wealth, but when they are sold in large quantities, that can lead to a rise in the interest the US treasury pays on its debt.

Effectively, this makes it more expensive for the US to borrow money to fund government spending. Economists are suggesting that the Trump administration’s intervention could be an attempt to limit the amount of US government bonds that Japan sells.

“Put yourself in US treasury secretary Scott Bessent’s shoes,” wrote Rebecca Patterson, a senior fellow at the council of foreign relations. “It is in his interest to do what he can to help Japan stabilize the yen sooner rather than later.”

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