The United States and Japan last week staged a coordinated intervention to halt the slide of the yen after the Japanese currency fell to a ۴۰-year low against the US dollar.
While it is unusual for authorities to intervene to help prop up another country’s currency, the yen has an important role in international finance as the world’s third-most-traded currency, meaning its depreciation has repercussions far beyond Japan.
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Here is everything you need to know about the currency intervention:
What is a currency intervention and how did the US and Japan coordinate?
A currency intervention occurs when a government or central bank buys or sells large quantities of foreign currency to help stabilise the value of its own currency.
In this case, the US and Japan coordinated an intervention to lift the value of the yen after it slid to ۱۶۳ against the dollar for the first time since ۱۹۸۶.
The intervention began on July ۳۱ when the US Treasury began selling euros for yen, while Japanese authorities also bought yen.
In the days after the intervention, the yen began to rise and reached ۱۵۷ to the dollar on Wednesday.
The US last staged a currency intervention with Japan in ۲۰۱۱ when the yen began appreciating rapidly following the Tohoku earthquake and tsunami.
It also stepped in to support the Japanese currency during the Asian Financial Crisis in ۱۹۹۸.
How did the yen get so weak?
The yen’s collapse is the result of longstanding economic challenges combined with new pressures from the US-Israel war on Iran.
Japan has struggled with economic stagnation since the early ۱۹۹۰s.
The Bank of Japan has for decades attempted to stimulate growth with ultra-low and even negative interest rates, a policy that has exerted downward pressure on the yen.
While Japan’s weak currency has helped draw record numbers of tourists and kept exports cheap, it has also placed a strain on households by raising the cost of imported goods.
Tokyo has spent tens of billions of dollars since ۲۰۲۲ trying to defend the yen, but the economic policies of successive Japanese leaders, including current Prime Minister Sanae Takaichi, have partly offset these efforts.
“Takaichi wants it all: Growth, loose fiscal policy, loose monetary policy and a stable yen – but their policy mix is leading to a weak yen, which is causing an inflation problem,” Chris Turner, global head of markets at ING, told Al Jazeera.
Why does the US want a stronger yen?
While Japan is a close US ally, Washington stepped in for its own benefit as much as Tokyo’s, said Masahiko Loo, a senior fixed income strategist at State Street Investment Management in Tokyo.
“Washington isn’t trying to strengthen the yen for Japan’s sake. It’s trying to prevent a disorderly decline that could spill over into Treasury markets, global funding conditions, and broader financial stability,” Loo told Al Jazeera.
“A free-falling yen isn’t just Japan’s problem. At some point it becomes a global liquidity and financial stability issue, which is why Washington stepped in.”
The yen is the most traded currency after the US dollar and the euro, which means dramatic changes in its value can have ripple effects across the global financial system.
One of Washington’s biggest concerns is the prospect of Japan selling off its holdings of US Treasury securities, which were valued at $۱.۱۱۴ trillion in May.
If the yen continued to fall, Tokyo would be encouraged to sell large quantities of US Treasuries to raise cash it can use to defend the currency.
That would put upward pressure on interest rates in the US, raising the cost of servicing the country’s rapidly growing national debt, which already exceeds $۳۹ trillion.
“The financial cost of intervention for the US is low and, given that President Donald Trump favours a weaker US dollar, the domestic political cost is minimal,” Shigeto Nagai, head of Japan economics at Oxford Economics, wrote in a research briefing on Monday.
“Coordinated intervention is a cost-effective method as it allows the US to do a significant favour for Japan, a precious loyal ally in Asia, and take some pressure off US interest rates.”
Will the intervention work?
While the joint intervention has provided short-term support for the yen, Japan will need to take more fundamental measures, such as raising interest rates, to raise the value of the currency in the long term, according to experts.
Japan’s benchmark interest rate currently stands at ۱.۰ percent, its highest since ۱۹۹۵ but far lower than other advanced economies, including the US.
The large gap between interest rates in the US and Japan is a primary driver of the yen’s persistent weakness.
Without a change in Japan’s low-interest-rate environment, the latest currency intervention is just “throwing good money after bad,” said Derek Tang, an economist and CEO of Monetary Policy Analytics, a US research advisory firm.
“Ultimately… the gravitational force of economic fundamentals will overwhelm intervention efforts,” Tang told Al Jazeera.
“Nevertheless, Japan seems very reluctant to tighten monetary policy to raise its own interest rates and allow the currency to appreciate in that manner,” Tang said.
“So this situation will persist for the time being.”
