Japan appears to be experiencing déjà vu from 2022: energy prices are soaring, the yen is hitting new lows, and the country’s finance minister is warning of possible interventions in the foreign exchange market.
In fact, the first round of intervention may have already taken place last Friday, reportedly totaling about 5.4 trillion yen (approximately $34.5 billion), although the impact was not exactly dramatic: USD/JPY fell by about 2.7% at the time, but as the new week began, the upward trend resumed.
But why is a weak yen such a bad thing? Doesn’t it help exports?
The main problem with a weak yen is its overall impact on the economy.
Rising energy and food costs place a burden on households, while a potential tightening of the Bank of Japan’s monetary policy could exacerbate both the budget deficit and the cost of servicing the country’s massive public debt.
On a global level, a sudden shift in interest rate expectations or a jump in yen confidence could trigger a sharp rebound. That would hit the yen carry trade, potentially weighing on the S&P 500, Nasdaq, and Dow Jones.
Will interventions help?
Currency interventions by the Bank of Japan can provide some short-term relief, but they don’t solve the underlying structural issues.
When the Bank intervenes, it sells dollars and buys yen, effectively draining liquidity from the system. This can push up government bond yields and increase stress in the debt market. While Japan does have substantial reserves (around $1.37 trillion), a large portion of them is tied up in securities, so the room for intervention is limited unless the regulator decides to dispose of its U.S. Treasury holdings.
The issue is that one-off interventions mainly buy time rather than solve the underlying problems, including high energy prices, high debt levels, and a still-large interest rate gap with the Fed.
Will the U.S. help Japan?
Earlier this year, the New York Fed conducted so-called rate check calls. This fueled expectations that the U.S. might join Japan in stabilizing the currency market. On the back of those rumors, the dollar weakened against most major currencies. However, shortly after, U.S. Treasury Secretary Scott Bessent stated that Washington would “absolutely not” intervene in the currency market, and the yen weakened again.
Now, if support doesn’t materialize and the Bank of Japan decides to defend its currency by selling U.S. Treasury bonds, volatility across global markets could spike
