Washington Can Support the Yen, But Not Break the Carry Trade

The Bank of Japan has intervened repeatedly to sell dollars and buy yen in recent years, but markets often fade those moves because Japan’s unilateral actions no longer carry the same weight they once did. Its interventions have historically struggled to produce sustained reversals in dollar/yen without external support. Coordinated intervention is therefore the key condition for any meaningful reversal in the currency pair’s trend.

Without alignment between the Bank of Japan and US authorities, intervention efforts may lack credibility in the eyes of market participants. Broader policy coordination, by contrast, signals a genuine shift in the macroeconomic environment.

Coordinated action amplifies credibility by signalling that defending the yen, or countering disorderly foreign exchange moves, is not Japan’s fight alone, but a shared priority among major economies.

The Plaza Accord of 1985 offers the clearest precedent: US participation was decisive in realigning exchange rates. Markets are forward-looking and narrative-driven; Washington’s involvement changes the story from “Japan fighting alone” to “major economies defending stability”. That shift in narrative can be as powerful as the actual liquidity provided.

Historical Episodes
The US last intervened to support the yen in 1998, during the Asian financial crisis, making the latest action the first in nearly 30 years to support the currency. The Treasury also intervened in the opposite direction after the Fukushima earthquake in 2011, but that was intended to prevent the yen from rising, not to arrest a fall. The US Treasury has the legal authority to intervene in the foreign exchange market, but has generally refrained from doing so in recent decades.

In January 2026, rumours of coordinated intervention by Japan and the US intensified after reports that the US Treasury had requested a “rate check”. The Federal Reserve Bank of New York was reported to have contacted banks about dollar/yen levels and market positioning.

Strategic Dialogue
“Including online meetings, we’ve held talks about 10 times for discussions that included exchange rates,” Japanese Finance Minister Satsuki Katayama said on Monday, referring to how frequently she had spoken with US Treasury Secretary Scott Bessent.

“When he visited Japan in May, we talked for three-and-a-half hours, including over dinner,” Katayama said while announcing Japan’s joint currency intervention with the US.

The May talks followed Japan’s large-scale yen-buying intervention between late April and early May, which failed to reverse the yen’s downtrend. In a sign that negotiations were intensifying, Katayama said after the May meeting that the two sides had been “coordinating very closely on foreign exchange and will continue to do so”.

With the yen touching a four-decade low this year, Japan’s top currency diplomat, Atsushi Mimura, has shifted tactics. Instead of a daily stream of calibrated verbal warnings against speculators, Mimura has focused on working behind the scenes with US counterparts. This has allowed Mimura, who has influence over the timing of intervention, to keep markets guessing about the prospect of action. He maintained a low public profile even as Katayama and Bessent held an online meeting in late June to discuss financial-market developments.

Acknowledging Japan’s concern over the weak yen, the US Treasury’s semi-annual currency report on July 24 echoed Tokyo’s warning against excessive volatility and pledged to continue “close consultations” with Japan on exchange-rate matters.

The Moment
On July 30, at a strategically chosen moment, after the Federal Reserve’s policy meeting and before the Bank of Japan’s, Japan’s Ministry of Finance carried out an estimated unilateral intervention of ¥8.5 trillion to ¥10 trillion, while the Federal Reserve Bank of New York conducted rate checks. This helped spur a sharp, though only partially sustained, rally in the yen from multi-decade lows. On July 31, Japan again sold dollars and bought yen, while the New York Fed sold euros against the yen on behalf of the US Treasury through two US dealers.

Also Read: Yen Intervention Raises Spectre of a Plaza Accord Remake

How the Intervention Worked
Even if Washington’s aims were conventional, correcting what it regarded as excessive volatility and fundamental exchange-rate misalignment, its methods were not.

The choice of instrument depends on the severity and source of market stress, and on whether the problem is liquidity-related, involving short-term funding needs, or valuation-related, involving exchange-rate misalignment. Historically, swap lines have been the preferred tool for liquidity crises, while direct intervention is less common and usually reserved for extreme situations.

The precise method of Treasury intervention was not immediately clear. The Federal Reserve has maintained dollar-liquidity swap lines with the Bank of Japan and four other major central banks since 2013. These allow foreign central banks to obtain dollars in exchange for their own currencies, helping ease dollar-funding stress. In this episode, however, the Treasury’s role appears to have been primarily to reinforce the policy signal.

The Treasury may have sold euros and bought yen, effectively increasing the Exchange Stabilisation Fund’s yen holdings at the expense of its euro holdings, perhaps to avoid having to explain to the US public why it was selling dollars.

The Treasury has only about $13 billion of euro-denominated foreign exchange reserves, comprising $1.2 billion in deposits and $11.7 billion in securities. That is small relative to both Tokyo’s activity in the foreign exchange market and the scale of global currency trading.

An Unusual Lack of Surprise
Media reports said the US Treasury had informed several banks that it could intervene in currency markets on Friday and that they should “stand ready for future action”.

The notice, channelled through the Federal Reserve Bank of New York, came a day after Japanese authorities intervened, putting the yen on course for its biggest weekly rise since February and pulling it away from four-decade lows against the dollar.

The advance notice reduced the element of surprise, ordinarily an important part of foreign exchange intervention. The Treasury also funded its yen purchases through a third currency, the euro, rather than the dollar, another unusual feature.

There was also the unusual episode of Bessent’s handwritten yen-purchase list. During the on-the-record portion of a cabinet meeting at Camp David, a Reuters photographer captured Bessent’s notepad. Under “To Do”, it said: “Buy Japanese Yen (JPY) $5-10 bil.”

News of potential US Treasury intervention helped lift the yen against the dollar on Friday. It last traded at 159.09 to the dollar after weakening to 163.65 on Thursday.

As they say once a dealer, always a dealer. 

The Treasury-Market Dimension
Japan is the world’s largest foreign holder of US Treasuries. Using the Federal Reserve’s Foreign and International Monetary Authorities Repo Facility as part of foreign exchange intervention could reduce pressure on Tokyo to sell Treasuries.

It could also reassure markets that US government debt would not face sudden liquidation pressure from a major holder, while strengthening the Fed’s role as a global dollar backstop during periods of currency volatility. For Tokyo, the facility offers a way to intervene without disrupting its reserve composition or creating friction with Washington.

The market assumption that Washington intervened mainly to stop Japan from selling Treasuries is therefore too simple. Japan’s Treasury holdings fell by nearly $67 billion in May to $1.14 trillion, the largest monthly decline since September 2022 and the third largest on record.

Why Washington Intervened

1. Strategic Reciprocity
Japan’s pledge to invest $550 billion in the US represents a landmark commitment to deepening bilateral economic ties and reinforcing confidence in US financial markets. In turn, Washington’s willingness to engage in coordinated foreign exchange intervention can be read as reciprocal support for yen stability.

This dynamic illustrates a broader principle of strategic reciprocity: Japan strengthens US capital markets through long-term investment, while the US helps safeguard yen stability through policy coordination. Together, these actions signal not only mutual economic benefit but also the resilience of the US-Japan alliance in navigating global financial volatility.

2. Yen Weakness Amid US Bond Fragility
Extreme yen weakness alongside fragility in the US bond market is a potentially destabilising combination. It could spill over into global asset markets and eventually require a larger response from authorities. That helps explain why Washington was willing to act, even through unconventional methods.

3. Once a Dealer, Always a Dealer
Bessent is a former hedge fund manager who spent decades trading currencies. He helped George Soros bet against sterling in 1992, in the episode that came to be known as “breaking” the Bank of England. It is therefore difficult to believe that he needed a handwritten note to remember such a rare and consequential policy step.

Bessent has nevertheless done things differently from his predecessors, including the Treasury’s direct purchase of Argentine pesos last year. The photographed note may therefore have been less a reminder than another unconventional way of shaping expectations.

The episode highlights the limits of a trader’s approach to policy. Notes, leaks and carefully staged signals can influence positioning and sentiment, but today’s foreign exchange market is too large and automated for psychology alone to deliver durable results. The tools of the 1990s do not map neatly onto the present global currency system.

The irony is that Bessent, who once helped Soros break the Bank of England, is now trying to influence a market that has outgrown many of the tools he mastered. Expectation management can reinforce policy, but it cannot substitute for it.

The Limits of Intervention
The recent intervention was historic not only because it strengthened the yen, but also because it demonstrated an unusual degree of policy coordination between Washington and Tokyo. Yet history suggests that intervention works best when supported by underlying fundamentals. The episode reinforces the case for viewing currency allocation through a longer-term lens rather than reacting to short-term moves.

The next move in dollar/yen will show whether the intervention established a durable ceiling near 164. A continued decline towards 155 would strengthen that case. A rebound towards 160, however, would suggest that the intervention delivered only a temporary pause in the yen’s longer-term slide.

Foreign exchange intervention may slow yen depreciation, but it does not fundamentally alter the calculus of carry traders. As long as the interest-rate differential remains wide, speculative flows will continue to lean against Tokyo’s efforts.

Intervention can stabilise the yen in the short term, but only a decisive narrowing of rate differentials can break the carry-trade dynamic. In practice, that would require a sustained Bank of Japan rate-hike cycle. Anything less leaves intervention treating the symptoms rather than the cause.

Also Read: A Little Help for Japan and the Return of Managed Currencies