On July 31, for the first time in 28 years, the US Treasury Department decided to buy the yen rather than sell it. The US explained the move as a desire to reduce the volatility of the Japanese currency, and President Donald Trump called it a friendly gesture. However, the world’s leading economy rarely offers assistance out of pure friendship – especially when it involves $10 billion. The US does not help others for nothing, and this step can only be explained by the fact that it brought far more benefit to America itself.
Why the US is helping Japan
By the end of July, the yen had plunged to a 40-year low, reaching 163.99 against the dollar. To prevent its currency from crashing further, Tokyo conducted currency interventions worth nearly $100 billion, after which Washington joined the effort. Instructed by the Treasury, the Federal Reserve Bank of New York bought the yen, causing the Japanese currency to strengthen by 5% in just two days.
The US authorities’ actions surprised the market. On August 3, Japanese Finance Minister Satsuki Katayama clarified that the US and Japan had conducted a joint yen purchase. This was confirmed by US Treasury Secretary Scott Bessent. He justified the intervention by citing a joint statement from last September regarding the stability of the yen, though the true motives are somewhat more self-serving.
The US needs this move to support the value of its external debt. Japan remains the largest holder of American securities, accounting for $1.2 trillion, or 13% of all foreign investment in Treasury bonds. To stabilize the yen, the Japanese government typically sells these securities, which causes their yields to rise. This is disadvantageous for the US, as it forces the country to issue new loans at higher interest rates, making the debt more expensive to service over time. In the first quarter of this year alone, Japan sold $30 billion in US government debt, helping push 10-year Treasury yields up to 4.7%.
To prevent the Japanese from selling off US government debt, the United States stepped in to assist with the interventions. This was largely a forced move, as Tokyo could no longer handle the situation alone. Back in the spring, the Japanese Ministry of Finance spent $73 billion to support its currency, but that only lasted for a month and a half before the exchange rate safely returned to its previous low. Consequently, the US allowed Japan to borrow dollars using Treasury bonds as collateral instead of selling them, which Tokyo used to buy another $100 billion worth of yen. Additionally, the US Treasury sold $10 billion worth of euros from its reserves for the interventions, which was enough to boost the yen by 5%.
Ultimately, it was a win-win situation. No one sold off American bonds, preventing their yields from rising, while the Japanese currency strengthened. For the US, this is a highly lucrative deal: it is much easier for them to provide a $100 billion loan than to spend tens of billions of dollars over many years servicing national debt at higher interest rates.
How the interventions will affect the ruble and other currencies
The US intervention pushed up not only the yen but also the currencies of Japan’s neighboring countries. For instance, the Korean won surged to a one-year high, while the Thai baht and Singapore dollar also gained ground. It is highly possible that central banks in these countries will coordinate further market operations to build on this success.
However, this had almost no impact on the ruble, because the Russian currency market has been cut off from global capital flows following US and EU sanctions against the Moscow Exchange. Over-the-counter (OTC) trading volumes for the dollar are small and barely influence the exchange rate. Currently, the ruble depends entirely on the Ministry of Finance’s foreign currency purchasing policy and the key interest rate. Still, the interventions could affect Russia indirectly, as a weaker dollar will support oil prices, bringing more revenue into the state budget.
Far more important is what this intervention means for the US itself. US government debt is considered the safest and most liquid instrument in the world, one that can be sold to anyone, at any time, and in any volume. But if America is unwilling to let major investors sell off Treasury bonds, it becomes harder to call such reserves freely convertible.
Therefore, many central banks may choose to hold more assets in other national currencies or gold. This is certainly not a fast process, but central banks already bought nearly 300 tons of gold in the second quarter, and the dollar’s share of global reserves has been declining for years.
Furthermore, if the US wants to keep its bond yields from rising, it will have to continue intervening. Within a few days, the yen has already corrected by 2% and, much like in the spring, will likely return to its previous levels in a couple of months. America will have to provide Japan with more and more loans to support the yen, and US Treasury Secretary Scott Bessent has stated that the interventions will definitely continue. However, without a tightening of monetary and fiscal policy in Japan, both countries will have to keep burning through tens of billions of dollars in the currency market just to delay the yen’s fall a little longer.
By Kirill Kuchinsky, Ph.D. (Economics), financial expert