“For the First Time Since 1998”… Why the US and Japan Are Moving to Defend the Yen [Weekend Money]

Guarding Against a “Japanese Bond Yield Crisis”
A Move to Prevent Fallout in U.S. Financial Markets
Ensuring Smooth Implementation of U.S.-Bound Investments

For the first time since 1998, the United States and Japanese monetary authorities have launched coordinated intervention in the foreign exchange market to defend the value of the yen. The unusual step of the U.S. joining yen purchases is seen as a move to prevent a “Japanese government bond yield crisis (a second Truss shock)” from erupting, as well as to ensure the smooth implementation of both South Korea and Japan’s investments in the United States.

An employee is holding a Japanese yen bill at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Yonhap News.

According to iM Securities on August 8, the Japanese government is estimated to have intervened in the foreign exchange market on July 30-31, with intervention volume on the 30th alone estimated at between 6 trillion and 8.5 trillion yen. The U.S. Department of the Treasury is also believed to have engaged in yen-buying intervention in the range of 5 to 10 billion dollars.

The first reason cited for the U.S. stepping in to defend the yen is to preempt a second Truss shock. The original “Truss shock” occurred in September 2022 after newly appointed UK Prime Minister Liz Truss announced a near-70-trillion-won tax cut, causing a surge in government bond yields and resulting in a bond market meltdown. More recently, with the Japanese cabinet led by Prime Minister Sanae Takaichi announcing a massive growth strategy that would inject 370 trillion yen by 2040, Japanese government bond yields have soared, exacerbating jitters in the bond and foreign exchange markets.

If Japanese government bond yields and the dollar-yen exchange rate both spike, the merits of overseas asset investments (such as U.S. Treasuries) for Japanese institutional investors—including life insurers and pension funds—diminish. Furthermore, should the Japanese government raise the domestic investment allocation of its Government Pension Investment Fund (GPIF) to suppress bond yields, or sell off its holdings of U.S. Treasuries to build up reserves for yen defense, the impact could deal a heavy blow to the U.S. financial markets, where 30-year Treasury yields are already at their highest since 2007.

The second reason is to support the implementation of South Korean and Japanese investments in the United States. If the values of the won and yen become unstable, there is a growing risk that these pledged investments may not proceed smoothly. Conversely, if such U.S.-bound investments continue amid volatile exchange rates, instability in the foreign exchange market may intensify, leading to the view that the U.S. has moved to coordinate market stabilization efforts.

Park Sanghyun, a researcher at iM Securities, commented, "For the time being, the trajectory of the yen will have a major influence on global government bond yields and dollar trends," adding, "Due to dollar-yen strength driven by trilateral currency market coordination, there will be additional downward pressure on the dollar-won exchange rate, which may approach the 1,400-won threshold earlier than expected."

This content was produced with the assistance of AI translation services.