The United States and Japan have jointly intervened in the foreign exchange market to defend the value of the yen. Following Japan's sale of dollars to purchase yen, the U.S. Treasury also began buying yen through the New York Federal Reserve. This collaboration to curb yen depreciation marks the first such effort between the two countries in 28 years, since 1998. The yen, which had approached 164 yen per dollar, fell to the mid-150s shortly after the intervention.
It is unusual for the U.S. to directly enter the market to support other currencies. Historically, the U.S. has criticized countries for artificially intervening in currency markets, particularly when it involves devaluing their own currencies to enhance export competitiveness, sometimes labeling them as currency manipulators. However, the U.S. has now opted to buy yen, recognizing that the yen's weakness is no longer just a concern for Japan's inflation and monetary policy but also poses a burden on U.S. financial markets.
The key issue lies in the U.S. Treasury market. Japan is a major investor, holding over $1 trillion in U.S. Treasury bonds. If the Japanese government were to sell off significant amounts of dollar assets to defend the yen, it could flood the market with Treasuries, leading to a drop in bond prices and a rise in interest rates. Given the existing pressures on long-term interest rates due to fiscal deficits and increased bond issuance, the U.S. cannot afford to ignore a large-scale sale of Japanese Treasuries.
Rising U.S. Treasury yields would increase mortgage and corporate loan rates, further burdening the federal government's interest payments. If long-term rates in the U.S. rise, it could lead to a stronger dollar, exacerbating the yen's weakness in a negative feedback loop. The U.S. support for yen stabilization appears to be a strategic move to allow Japan to respond to foreign exchange market pressures without selling off Treasuries, thereby preventing instability in U.S. interest rates. While the intervention aims to defend the yen, it is fundamentally tied to the stability of the U.S. Treasury market.
This collaboration also highlights that currency issues are no longer confined to individual countries' export competitiveness. A sharp decline in one country's currency can affect foreign exchange reserves and bond trading, impacting market interest rates in other nations. The U.S.'s decision to intervene directly indicates the growing instability in the Treasury market.
However, market intervention alone cannot eliminate the root causes of yen depreciation. As long as there is a significant interest rate gap between the U.S. and Japan, coupled with Japan's accommodative monetary policy, pressure on the yen is likely to persist. This intervention is more about calming excessive volatility rather than permanently reversing the yen's direction. Japan will need to address imbalances in its interest and fiscal policies to avoid continued reliance on U.S. support.
South Korea cannot view this situation as unrelated. Although the won-dollar exchange rate has recently dropped significantly, a rapid appreciation of the won can also undermine the profitability of export companies and increase uncertainty in financial markets. The focus should not be on maintaining a specific exchange rate level but on preventing extreme fluctuations that are disconnected from economic fundamentals.
The government and the Bank of Korea should enhance communication regarding exchange rates with major countries like the U.S. and Japan. While it is essential to respond decisively to excessive market volatility, the focus should be on maintaining foreign liquidity and market confidence rather than relying solely on intervention. This U.S.-Japan collaboration has demonstrated that exchange rates influence not only trade competitiveness but also Treasury yields and financial market stability.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.