US and Japan Split Over What Comes After Yen Support Operation
Washington and Tokyo have carried out their first coordinated currency intervention in 15 years. The immediate market impact was clear, but the two governments are now diverging on what should follow.
US Treasury Secretary Scott Bessent said on Aug. 2 that the Bank of Japan has been too slow to normalize policy, arguing the central bank is \u0022behind the curve\u0022 on inflation. His remarks came hours after the US and Japan stepped into markets to support the yen after it slid to about 164 per dollar, its weakest level in nearly four decades.
The joint operation, conducted around Aug. 23, is estimated to have seen Japan spend about $3659 billion to defend the currency. The US also participated, marking the first coordinated yen-buying effort since 2011, when the two countries acted together after the Fukushima disaster. The yen later rebounded into the 155157 range, pulling back from the near-40-year low.
Bessent has framed intervention as a temporary tool rather than a lasting fix. He has argued the more durable answer is for the BoJ to raise interest rates, a step the central bank has been reluctant to take despite persistent inflation pressures.
The BoJ kept its policy rate unchanged at 0% at its July 3031 meeting, days before the intervention. The decision was not unanimous, highlighting growing internal divisions and more frequent split votes that suggest a hawkish bloc is gaining influence. Even with rates on hold, the BoJ signaled a tighter stance could come at its next meeting on Sept. 1617, and markets have increasingly priced in a September hike amid firm inflation data and unusual public pressure from the US Treasury.
Bessent has also pushed to expand the Federal Reserve\u0027s FIMA repo facility, currently capped at $60 billion, to bolster dollar liquidity when allied central banks need to defend their currencies. The facility allows foreign central banks to temporarily exchange US Treasury holdings for dollars. With Japan potentially deploying tens of billions of dollars in intervention, dependable access to dollar funding becomes strategically important.
Investors are now focused on the Sept. 1617 BoJ meeting as the key near-term event for Japanese assets. Even a modest rate increase would mark a psychological shift for a central bank long associated with ultraloose policy.
If the BoJ tightens, Japanese government bonds could come under pressure, pushing yields higher. Japanese equities may also face headwinds, as years of gains have been supported by cheap funding and a weak yen that lifted exporters\u0027 earnings. A stronger yen would reverse some of that benefit by making exports more expensive overseas.
In cross-border flows, higher Japanese rates would narrow the gap between yen and dollar yields and could unwind carry trades built on cheap yen funding. The last BoJ policy surprise to disrupt carry trades, in the summer of 2024, triggered a sharp global selloff in risk assets.
