The sharp depreciation of the Japanese yen and a joint intervention by Tokyo and Washington have renewed scrutiny of Japan’s monetary policy and the risks that currency instability poses to global financial markets.
The US and Japan intervened in the foreign exchange market on July 31 to curb speculative selling of the yen and reduce excessive volatility, following an initial intervention by Japanese authorities a day earlier.
The dollar-yen exchange rate, which reached 163.92 on July 29, climbed to 163.75 on July 30 before falling to 157.98 after the first round of intervention. It ended the day 2.36% lower at 159.54.
The joint intervention became official on July 31, sending the pair down from an intraday high of 160.89 to 157.58, a decline of 1.23%.
Japanese authorities spent approximately 8.45 trillion yen, or about $59 billion, during the July 30 operation, while the coordinated move with the US followed the next day.
The move marked one of the first coordinated foreign exchange interventions by the two countries since the G7 operation after Japan’s 2011 earthquake, when authorities sold yen to curb excessive appreciation.
The last time Washington and Tokyo jointly bought yen to support the currency was during the 1998 Asian financial crisis, nearly three decades ago.
Analysts said the latest intervention extended beyond US support for a key Asian ally, as the yen’s depreciation threatened to destabilize global bond markets and the US public borrowing system.
Yen falls to 40-year low amid oil shock
The yen has remained under pressure because of the wide interest-rate gap between Japan and the US, while rising oil prices linked to the Middle East conflict have increased costs for Japan, a major importer of energy and raw materials.
The currency weakened toward 164 per dollar, its lowest level in about 40 years.
Although a weaker yen improves the competitiveness of Japanese exports, it also increases import costs and erodes household purchasing power.
The Bank of Japan raised its policy rate to 1%, the highest level in 31 years, but the move failed to provide lasting support for the currency.
Japanese Finance Minister Satsuki Katayama said Tokyo and Washington purchased yen to restrain excessive volatility and disorderly market movements in line with the US-Japan Finance Ministers’ Joint Statement issued on Sept. 11, 2025.
Washington’s involvement was also driven by concerns over the US Treasury market, the benchmark for global borrowing costs.
Japan is the largest foreign holder of US government debt, with holdings of approximately $1.14 trillion.
As the yen weakened toward 164 per dollar, Japanese investors and authorities faced the risk of selling US Treasury securities to raise dollars and secure yen liquidity. Large-scale sales could have pushed US yields significantly higher, increasing mortgage rates and corporate borrowing costs.
US Treasury Secretary Scott Bessent said Japan used the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) repurchase agreement facility to finance the intervention.
The facility allows foreign central banks to obtain short-term dollar funding from the Federal Reserve by pledging US Treasury securities as collateral, enabling Tokyo to raise liquidity without selling bonds on the open market.
Bessent said he would propose expanding the facility’s capacity, subject to approval by the Federal Open Market Committee under Fed Chair Kevin Warsh.
The intervention also supported Washington’s trade and industrial policy objectives. An excessively weak yen could make Japanese products substantially cheaper in the US, offsetting the protective effect of President Donald Trump’s tariffs.
Currency volatility also threatened yen-funded carry trades, in which investors borrow at low rates in Japan to invest in higher-yielding US assets. A sharp rebound in the yen could trigger margin calls and rapid unwinding of positions across global markets.
The New York Fed helped counter speculative pressure by purchasing yen, creating a barrier against further disorderly moves.
Joint intervention seen as ‘containment’
Chris Turner, head of global markets research at ING, said the dollar remained strong despite an estimated $70 billion-$80 billion in foreign exchange sales by Japan and the US and a decline in oil prices.
“In theory, the dollar should be broadly weaker today after the US and Japanese authorities confirmed joint FX intervention,” Turner said in an ING Think article.
He said uncertainty over whether the Fed would raise interest rates in September continued to support the dollar.
Markets had briefly priced in less than 10 basis points of tightening after Warsh’s press conference last week, but expectations later rose to 16-17 basis points amid concerns that leaving rates unchanged could intensify selling in long-dated Treasuries.
US 30-year Treasury yields remained above 5.20%, while the 30-year mortgage rate rose to 6.75%, Turner noted.
He said upcoming US labor market data, including job openings, private payrolls and nonfarm payrolls, would be decisive for the Fed’s September decision.
Turner said the intervention could limit speculative attacks on the yen but would not alter the underlying monetary and fiscal conditions.
“We struggle to see this bilateral action driving USD/JPY sustainably below 155,” he said, adding that it could prevent investors from pushing the exchange rate above 160 and give Tokyo time to introduce policies more supportive of the yen.
