Why is the US Treasury propping up Japanese yen? Experts explain
Japan's yen recently touched its lowest value against the dollar in 40 years.
The United States has mounted an intervention to prop up the value of the Japanese yen, which recently touched a four-decade low against the dollar.
Japan, which depends largely on imported food and fuel, has grappled with rising inflation over recent months due in part to a historic oil shock set off by the Iran war.
The oil shortage has pushed up worldwide crude prices, putting pressure on Japanese consumers already strained by the declining purchasing power of their currency.
The uptick of inflation has coincided with government proposals meant to revive the ailing economy. In November, Japan approved a $135 billion stimulus package that included energy subsidies for cash-strapped households.
The government stimulus, however, threatened to deepen the fiscal challenges faced by Japan, whose public debt stands at more than 200% of gross domestic product. Fiscal woes could put additional pressure on the yen, since it may force Japan to print currency in the future as a means of addressing the national debt.
The Bank of Japan (BOJ), meanwhile, has maintained interest rates at relatively low levels, which makes the yen less appealing for investors, further eroding the value of the currency. Some observers expect the BOJ to raise interest rates over the coming months, but such a move could work against efforts to stimulate the economy.
Japanese Prime Minister Sanae Takaichi, a Trump ally, has faced pushback over accelerating price increases and economic strain.
"It's a perfect storm that motivates Japan to seek a stronger yen," Paolo Pasquariello, a professor of finance at the University of Michigan, told ABC News.
"The other side of the coin: A stronger yen is beneficial to the U.S.," Pasquariello added.
Analysts who spoke to ABC News said U.S. intervention to support the yen may allow Japan to avoid selling U.S. Treasury bonds or treasuries, preventing a possible source of upward pressure on interest rates.
A stronger yen would also make U.S. exports more affordable for Japanese buyers, potentially helping stabilize Japan's economy and fulfill a Trump administration goal of reducing U.S. trade deficits with major partners, they said.
Last year, U.S. goods exported to Japan totaled $82.1 billion, putting their value at little more than half of $146.0 billion in imports, according to data from the Office of the United States Trade Representative.
"The price of American goods to the Japanese in yen is double what it was 20 years ago," Richard Michelfelder, a professor of professional practice at Rutgers University, told ABC News.
"Why is that bad? They don't buy as many of our products. They're one of the largest and wealthiest economies in the world," Michelfelder added.
The U.S. intervened on Friday in coordination with the Japanese government, U.S. Treasury Secretary Scott Bessent said in a post on X on Sunday.
"The Trump Administration delivers for America's trusted partners. Economic security is national security. And the U.S.-Japan alliance is built on both," Bessent said. "We strongly support Japan's decisive market and monetary steps to correct the substantial undervaluation of the yen."
Without help from the U.S., Japan may have had to sell some of its large holdings in U.S. treasuries as a means of raising money to prop up the yen on its own, Rutgers' Michelfelder said.
If Japan were to dump treasuries onto the market and the supply of them were to grow, then bond yields would rise. A rise in bond yields, in turn, would push up interest rates, driving up the federal government's debt payments and even the cost of a private mortgage loan.
Treasury yields already stand at elevated levels, after the Iran war stoked rising inflation and pushed up borrowing costs.
The average interest rate on a 30-year fixed mortgage, which closely tracks the 10-year Treasury yield, stands at 6.66%, its highest level in a year, Freddie Mac data last week showed.
"This helps keep U.S. rates down," Michelfelder said. "Japan holds many hundreds of millions of dollars in U.S. treasury bonds. If they have to sell some to buy yen, that will come back to bite us."
A too-strong yen could pose difficulties for the U.S., however. The prospect may unwind the "carry trade," a financial maneuver in which investors unload cheap-to-borrower currencies and buy currencies promising greater yield.
The ultimate effect of the U.S. currency intervention is uncertain, according to University of Michigan's Pasquariello. The vast size of currency markets makes it difficult for interventions of this type to endure, though it may push up the value of yen in the short term.
"It's very difficult to change the direction of the trend in a market as massive as the currency market," Pasquariello said. "This intervention by the government is a drop in the bucket."
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