Washington and Tokyo coordinate action as the currency approaches 40-year lows
The United States has launched an intervention to support the value of the Japanese yen, marking an extraordinary coordinated effort with Japan’s government to halt the currency’s decline as it approaches its lowest levels in nearly four decades.
Japan has been struggling to contain a prolonged slide in the yen, which has increased pressure on an already fragile economy. The country relies heavily on imports for energy and food, meaning a weaker currency raises costs for businesses and consumers.
The Trump administration’s decision to assist Japan comes as Prime Minister Sanae Takaichi faces growing political pressure to control inflation and restore sustainable economic growth.
Why is the yen falling?
Japan has spent billions of dollars since 2022 attempting to slow the yen’s decline, but the currency has continued to weaken. The drop has been driven by continued selling from investors, as well as global economic and geopolitical developments.
Japan’s dependence on energy imports from the Middle East has increased the pressure on the currency. Disruptions to oil and gas supplies linked to the US conflict with Iran have pushed energy costs higher, adding to inflation concerns.
The Japanese government has attempted to reduce the impact on consumers by spending billions on fuel subsidies, but higher import costs continue to weigh on households and businesses.
The Bank of Japan’s monetary policy has also contributed to the yen’s weakness. The central bank has maintained unusually low interest rates, making the currency less attractive to international investors compared with higher-yielding alternatives.
Government debt is another major factor. Japan continues to spend heavily on economic support measures and programs related to its ageing population. Public debt now exceeds 200% of GDP, the highest level among G20 economies.
Why did the Trump administration intervene in the yen?
The first signs that the United States could intervene emerged during a Trump administration cabinet meeting, where Treasury Secretary Scott Bessent was photographed with a note referencing plans to buy between $5 billion and $10 billion worth of Japanese yen.
Trump later confirmed that the US Treasury had purchased billions of dollars in yen, marking the first time in 30 years that the United States has taken such action to strengthen the Japanese currency.
The US president said the intervention would be beneficial for the global economy, although some analysts believe Washington also has an interest in limiting the impact of Japan’s efforts to support the yen.
To buy yen, Japan has been selling US government bonds, known as Treasuries. Large-scale sales of these bonds can increase US borrowing costs by pushing Treasury yields higher.
Economists suggest that the Trump administration’s involvement may partly reflect concerns that continued Japanese bond sales could put additional pressure on US government financing.
The role of Sanae Takaichi’s economic policies
Prime Minister Sanae Takaichi has promised to revive Japan’s economy, but she is facing political challenges as rising import costs, energy disruptions, and the weak yen affect public confidence.
In an effort to ease cost-of-living pressures, Takaichi announced plans to temporarily reduce sales taxes on food. She has also proposed hundreds of billions of dollars in investment across different sectors as part of a pro-growth economic agenda.
However, concerns remain over how these measures will be financed given Japan’s already high debt levels. Some experts have warned that excessive spending could trigger market instability similar to the crisis experienced by former UK Prime Minister Liz Truss.
Uncertainty surrounding Japan’s fiscal policies has contributed to market volatility, which has further pressured the yen.
How unusual is the US intervention?
The US move follows another recent currency intervention involving Argentina. In October, the US Treasury purchased billions of dollars in Argentine pesos to support the country’s financial stability before a key election.
At the time, Bessent said the action was intended to support Argentina’s reform agenda under President Javier Milei, a political ally of Trump.
Some analysts believe Trump may view Takaichi similarly as an aligned partner, which could have influenced the decision to support the yen.
Under Takaichi’s leadership, Japan has approved its largest military expansion since World War II, with plans to increase defence spending to 2% of GDP over the next five years.
The policy has faced criticism from those concerned that Japan is moving away from its traditional postwar pacifist stance. However, it has been welcomed by the Trump administration, which has encouraged allies to take greater responsibility for their own defence.
