The first coordinated currency intervention by Washington and Tokyo in three decades has failed to ease the anxiety gripping foreign exchange markets, leaving traders to question the stability of a global financial system increasingly dependent on the Japanese yen.
The operation, which saw Treasury Secretary Scott Bessent’s team reportedly buy between $5 billion and $10 billion worth of yen while Japanese authorities spent more than $50 billion, initially pushed the exchange rate to about 157 yen per dollar from nearly 164. But those gains have largely faded, with the currency hovering around 159 on Friday.
Analysts described the move as a temporary fix for symptoms rather than a cure for the underlying causes of the yen’s weakness. Japan’s public debt exceeds 200 percent of gross domestic product, fiscal stimulus is expected to widen the deficit further, and the Bank of Japan has been reluctant to raise interest rates even as inflation runs high.
That the intervention was deemed necessary at all highlights how precarious the yen’s position has become. According to Wall Street veteran Ed Yardeni, the yen now serves as a load-bearing piece in the global financial structure. “Now traders are watching the ‘yen carry trade,’ where cheap yen borrowing funds bets on higher-yielding assets worldwide, and wondering if it’s about to blow up,” Yardeni wrote in a note Tuesday. “The financial system right now looks like a giant Jenga tower with the yen as a load-bearing piece.”
The way the intervention was conducted raised additional red flags. Instead of selling dollars to buy yen, the United States reportedly sold euros, while Japan borrowed against its holdings of U.S. Treasuries rather than selling them outright. These tactics cast doubt on the dollar’s dominance and underscored concerns within the Trump administration that a spiraling yen could worsen America’s own debt outlook.
Japan holds more than $1 trillion in U.S. government debt, making it the largest foreign creditor. Any significant drawdown of those reserves would push Treasury yields higher and increase Washington’s borrowing costs. Other Asian nations might follow suit, though Yardeni noted they are in better shape than during the 1998 Asian financial crisis, when regional currencies collapsed. Still, he cautioned that risks remain.
“Team Bessent isn’t exactly hat in hand,” Yardeni added. “But decades of assuming that Asia’s central banks dutifully would keep buying U.S. debt are catching up with Washington. Each Jenga piece gets harder to pull without something toppling.”
The yen’s retreat after the intervention was especially telling because it occurred even as U.S. inflation data came in cooler than expected, reducing the likelihood of an imminent Federal Reserve rate hike. Prior to this, the yen’s slide had been driven by the Bank of Japan’s hesitation to tighten policy and fears that the Fed could raise rates as soon as next month. This week’s tame consumer and producer price readings offered the yen no relief.
Robin Brooks, a senior fellow at the Brookings Institution, said the yen’s failure to rally under such conditions is deeply troubling. “This should be a setting where the Yen rallies versus the Dollar, because US rates are falling relative to Japanese ones, but that didn’t happen. The Yen continued to fall, which is a really worrying sign,” Brooks wrote in a Substack post titled “The Yen is in Deep Trouble.”
Brooks has repeatedly warned that the yen’s prolonged decline is a symptom of an emerging debt crisis. He argues that market intervention is doomed to fail and merely creates an illusion of stability. On Friday, he called for a “profound shift” in Bank of Japan policy, going well beyond incremental rate increases. For the yen to strengthen, long-term yields on Japanese government bonds must rise to narrow the gap with U.S. yields.
“BoJ buying of government bonds needs to be scaled back so that this can happen,” Brooks added. “That’s the only thing that will strengthen the Yen.”
With the yen still under pressure and the global financial system increasingly resembling a precarious game of Jenga, market participants are left wondering whether policymakers have the tools, or the will, to address the deeper imbalances. For now, the intervention has bought time, but it has not resolved the underlying tensions.
