Trump is saving the yen. But with the euro, so as not to affect the dollar

The yen has weakened to such an extent that the United States intervened to halt its fall; however, it purchased the Japanese currency using euros rather than dollars: a strategic decision designed to avoid weakening its own currency and, above all, to avoid disrupting the Treasury market. On Friday, in fact, the US Treasury and the Japanese Ministry of Finance intervened jointly in the foreign exchange market – something that had not happened to prop up the yen since 1998. Yesterday, the operation was formalised in a statement from the Japanese Ministry of Finance, whilst US Treasury Secretary Scott Bessent warned that he would “not hesitate” to repeat it. Last Thursday, the yen had slipped to its weakest level since 1986, at 163.73 yen to the dollar, before settling yesterday below 157 yen to the dollar following the joint intervention and the official statement.

President Donald Trump, speaking to reporters from Air Force One, explained that Japan “asked for a little help. It was mainly a gesture of friendship, because the yen is weakening and the dollar is doing brilliantly” (going on to say: “We’ve done $25 billion with Argentina, and hundreds of billions of dollars with Venezuela. I’m doing a great deal of business for the country”, leaving the question open: what will Washington want in return for having propped up the yen?).

For years, investors around the world have been carrying out the same operation: they borrow yen – because interest rates in Japan stand at 1 per cent – convert it into dollars and invest it in the United States, where rates are now between 3.50 and 3.75 per cent. This phenomenon is known as the carry trade. The problem is that a weak yen – which has, in fact, been an advantage for Japanese exports for decades – makes everything imported from abroad more expensive. Japan imports 90 per cent of the energy it consumes and pays for it in dollars; and in recent months, with the crisis in the Strait of Hormuz, it has found itself paying more per barrel with a currency that is worth less. Consequently, inflation is rising in an economy which, according to the Bank of Japan, is set to grow by 0.6 per cent this year. Raising interest rates further would help strengthen the yen, and the Bank of Japan has signalled that it is ready to do so. In the immediate term, however, Tokyo has chosen to buy yen directly on the market, and to do so it needs dollars, which it can obtain by selling – as it has done in the past – some of its holdings of US government bonds, of which it is the largest foreign holder, with approximately 1,100 billion dollars’ worth. To put this into perspective, in May Japan’s sales of US government bonds reached $66.7 billion in a single month, whilst Friday’s US intervention, according to rumours, is estimated to have amounted to between $5 billion and $10 billion.

Hence the ‘unusual’ nature of the operation. The New York Fed is said to have bought yen on behalf of the Treasury by selling euros, via Goldman Sachs and Morgan Stanley. Paying in dollars, experts explained to Bloomberg, would have weakened the dollar and the ‘strong dollar’ doctrine – the very one Trump boasted about from the presidential aircraft – just as inflation in the United States remains above target. And yesterday, the Japanese Ministry of Finance announced that future interventions will utilise the facility through which the Fed lends dollars to foreign central banks in exchange for US securities held as collateral, without these being sold (the FIMA repo, very similar to the ECB’s Eurep facility). The intervention was aimed at preventing sales of Treasuries, not at weakening the dollar. The euro was merely the means to achieve these objectives: the operation weakened it by almost 4 per cent against the yen, whilst it remained stable against the dollar. The sale of euros would only take on a different political significance if it became systematic and on a much larger scale; something that the US’s meagre euro reserves do not allow.

For analysts at the major banks, however, the yen’s recovery has probably already run its course. Chris Turner, head of currency strategy at ING, described it as “a containment operation”, because it discourages those who were betting on the yen rising above 164, without, however, resolving the issue in the long term.