Yen Plummets to 40-Year Low as U.S. and Japan Join Forces to Stabilize Currency

Central Message

(CNA, Washington, August 3) — Following the recent plunge of the Japanese yen to its weakest level in 40 years, the United States has unusually joined forces with Japan to intervene in foreign exchange markets to support the yen. The depreciation of the yen increases import costs and household spending in Japan, while also raising U.S. interest rates and disrupting Japan’s planned $550 billion investment in the United States.

Financial news site CNBC reports that the yen recently hit near its weakest level in nearly four decades, depreciating to 163.73 yen per dollar on July 30 before rebounding to 157.57 yen.

This coordinated intervention marks the first time since 1998 that the U.S. and Japan have jointly bought yen, and the first coordinated action since 2011, when G7 nations intervened after Japan’s earthquake to weaken the yen.

● Four Key Factors Weakening the Yen

Bloomberg News identifies multiple factors suppressing the yen’s value. The primary reason is Japan’s ultra-low interest rates compared to significantly higher rates in the U.S. and other major economies. This encourages investors to borrow cheap yen to invest in higher-yielding overseas assets, creating sustained downward pressure on the yen due to capital outflows.

Secondly, investor concerns over Japan’s fiscal outlook further weaken the yen. Japan’s debt-to-GDP ratio exceeds 200%, the highest among major economies, and persistent budget deficits raise market doubts about government solvency, severely undermining confidence in Japanese assets and the yen.

Geopolitical tensions involving the U.S., Israel, and Iran have further intensified yen depreciation. Japan relies almost entirely on energy imports, mostly crude oil from the Middle East. Rising oil prices mean Japan must pay more dollars for energy, increasing demand for foreign currency and weakening the yen.

Additionally, global inflation fueled by Middle East conflicts has shifted market expectations for U.S. interest rates from anticipated rate cuts to potential hikes. This makes dollar-denominated assets more attractive, further pressuring the yen.

● Why the U.S. Is Intervening Now

The Wall Street Journal notes the last time the U.S. helped strengthen the yen was in 1998 during the Asian financial crisis. In 2011, after Japan’s earthquake, the yen sharply appreciated, and Washington intervened—but then to weaken the yen, not support it.

The U.S. has several reasons for wanting a stronger yen. If the yen depreciates rapidly and disorderly, it could affect other assets. The yen is a popular funding currency due to interest rate differentials between Japan and other regions, including the U.S.

For the U.S., this is especially critical. If Japan resorts to selling its massive holdings of U.S. Treasury bonds to fund intervention, it could further drive up U.S. bond yields and interest rates—already under upward pressure.

A weak yen also makes it harder for Japanese firms to finance their $550 billion investment plan in the U.S. This investment is a core component of the 2025 U.S.-Japan trade agreement and a top priority for the Trump administration.

Trump has long expressed a preference for a weaker dollar to reduce the U.S. trade deficit and support manufacturing reshoring.

● Hidden Calculations: Bonds, Geopolitics, and Trade

CNBC cites industry experts noting one key U.S. objective: preventing Japan from being forced to sell large volumes of U.S. Treasuries to fund unilateral currency intervention. Japan is currently the largest foreign holder of U.S. debt.

Louise Loo, Asia Economist at Oxford Economics, states outright that preventing such a sale is a key factor behind U.S. involvement in yen intervention.

Masahiko Loo, Senior Macro Strategist at State Street, adds that Washington fears prolonged yen weakness could trigger a sell-off in Japanese government bonds (JGBs), pushing up yields. With both Japan and the U.S. facing rising long-term borrowing costs, higher yields could spill over into global bond markets.

Beyond protecting U.S. bond markets, this intervention reflects broader U.S. economic and geopolitical priorities. Louise Loo notes the U.S. repeatedly claims the yen is “significantly undervalued,” arguing that yen weakness gives Japan an unfair trade advantage by boosting export competitiveness—motivating corrective action.

She also suggests that if Washington believes Japan’s fiscal policies are driving up JGB yields and weakening the yen, joint intervention buys time for the Bank of Japan until it can eventually raise rates later this year. However, she stresses that lasting yen strength requires tighter monetary policy from Japan, not repeated interventions.

● What Other Measures Can Japan Take?

On August 3, Japan’s Finance Minister Katagami Satsuki announced plans to use a pandemic-era borrowing facility to obtain U.S. dollars from the Federal Reserve, rather than selling U.S. Treasuries to fund intervention.

Bloomberg notes that beyond tightening monetary policy to narrow the interest rate gap with the U.S., Japan could boost domestic investment. Increased local investment would raise demand for yen-denominated assets. In June, Prime Minister Takai Hayame unveiled an industrial strategy to expand private investment in AI, semiconductors, defense, and shipbuilding.

Katagami has also urged large pension funds, including the Government Pension Investment Fund, to increase allocations to domestic assets and suggested including Japanese government bonds in tax-free individual investment schemes. Takai emphasized encouraging households and public pension funds to invest more in Japanese financial assets. Such policy signals briefly supported the yen.

Additionally, fiscal reforms like cutting government spending and reducing national debt could bolster market confidence in Japan’s finances, enhance asset appeal, and support the yen long-term. However, these measures typically take years to show results.

● Could U.S.-Japan Intervention Backfire?

CNBC reports that the U.S. may have sold euros—not dollars—to buy yen, surprising markets, as past coordinated interventions used dollar assets.

Robin Brooks, Senior Fellow at the Brookings Institution, criticized the U.S. approach, calling it “confusing and potentially counterproductive.”

He said: 'On the surface, this might seem to amplify the intervention’s impact, but U.S. involvement raises more questions than answers—especially selling euros to buy yen, which is very strange. In my view, this undermines the credibility of U.S. involvement because markets will inevitably ask why the U.S. didn’t just use dollars.'

Brooks argues that currency intervention ultimately cannot reverse yen depreciation driven by Japan’s bond market dynamics. (Translation: Chen Yi-wei) 1150804

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