The Japan-US currency deal could do more harm than good

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Jeanine Krist

Content Writer at The New Global Order

Jeanine is a current MA student at Universitat Pompeu Fabra in Barcelona, studying Asian-Pacific studies in a Global Context. I'm focusing my research on the intersection of geopolitical economy and social policy, exploring how global power shifts impact both regional security and local socio-economic developments.

Latest posts by Jeanine Krist (see all)

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In late July this year, the Japanese yen sank to its weakest point since 1986, to 164 yen per dollar. Days later, Tokyo and Washington accomplished something they had not done together in almost three decades – they jointly intervened to prop the currency back up. On paper, it looked like an obvious move. A weak yen was punishing Japanese households at the pump, from domestic shopping to travelling abroad. A coordinated show of force by two of the world’s largest economies should have been enough to turn the tide. Trump called it a favour to a friend, and for a few days, markets seemed to agree it worked.

It did not. Within a month, roughly half of the intervention’s gains had evaporated. The yen was back above 160 yen, and analysts were warning it could reach again its pre-intervention low. The intervention is worth some examination, not because it failed spectacularly, but because it failed exactly as predicted. It did so while costing Japan money, room to manoeuvre, and the trust of a key ally.

What happened?
Japan stepped in first alone on 31 July, spending an estimated $100 billion of its own reserves. The United States joined the same day, buying yen with euros however, rather than dollars. According to a handwritten note the US Treasury Secretary Scott Bessent left at a Camp David cabinet meeting, this was worth somewhere between $5 billion and $10 billion. Japan’s finance minister, Satsuki Katayama, confirmed the joint account on 3 August, and pledged for more if needed. The yen recovered from 164 yen to around 155 yen.

The recovery didn’t last. By mid-August, the yen had climbed back past 160 yen. By the end of the month, it was trading around 159.8 yen. The Nikkei, meanwhile, fluctuated throughout the period, falling when the yen strengthened, recovering when it weakened again. A sign of how tangled Japan’s currency and equity interests have become.

It did not work – just as everyone predicted
The most basic argument against this kind of intervention is also the simplest: it doesn’t solve anything. Currency analysts flagged the risk before the ink was dry. Intervention only holds if it’s backed by a genuine shift in economic fundamentals, and Japan didn’t change anything economically. The Bank of Japan did not raise interest rates, Tokyo didn’t pair the intervention with fiscal tightening that might have reinforced it. No spending cuts, no tax increases.

Japan has seen it before. Interventions in 1997 and 1998 worked for only some days. A joint action with the US in 1998 lasted for about ten trading days. Spring 2026 saw 11.7 trillion yen spent to prop up the currency, with gains that faded almost as quickly as they appeared. The July-August intervention fits the same pattern. The money is spent, a brief rally occurs, but then there is a slide back towards where it started.

What it cost Japan
The bigger problem is that this isn’t a free option. Every intervention draws down reserves, and it does so while leaving the structural cause of the weak yen untouched. Japan is boxed in. The one move that would actually work – raising rates significantly – is one it can barely afford. Government debt above 230% of GDP means higher rates translate almost immediately into sharply higher debt-servicing costs. At the same time, mortgage holders exposed to floating rates would also feel the squeeze.

That constraint shows up in how Japan conducted the intervention. Rather than sell US Treasuries to fund yen purchases, which would have pushed up US bond yields, Tokyo used a Federal Reserve repo facility to borrow dollars instead. It’s a small technical choice, but with a larger meaning. Even in defending its own currency, Japan is operating within limits set by what Washington finds acceptable.

Washington, for its part, is not shy about extending that leverage. Reporting suggests the US is now pushing Prime Minister Sanae Takaichi to show more fiscal discipline. Treating her government’s spending plans as part of the problem behind the weak yen and rising long-term rates.

That’s a foreign finance ministry shaping Japan’s domestic budget debate. It’s the price Japan has to pay for its support from the United States. It doesn’t show up in the billions spent on FX purchases, but it’s real all the same. Bond markets seemed to notice. Japan’s 10-year yield hit a fresh 30-year high of 2.95% during this same period. Currency intervention or not, investors weren’t convinced.

What it meant for the Japanese
The policy was meant to help the people of Japan, however, it is hard to see this actually happening. The two categories driving the cost of living, food and energy prices, kept rising through and after the intervention. The government’s actual response to that pressure, a planned cut to the food VAT rate, treats the symptoms rather than the underlying currency weakness. The intervention itself did nothing to change household purchasing power once its effects wore off. Real wages and the large cash savings many Japanese households hold remain exposed to the same imported inflation as before. Whatever psychological reassurance came from headlines about the yen “strengthening” in early August had faded within a matter of weeks.

What it meant abroad
The intervention’s international fallout is smaller than its domestic costs, but it isn’t nothing. The US funded its share by selling euros rather than dollars and, according to reporting, did not inform the European Central Bank before doing so. The European Central Bank only learned the details after the transaction had taken place, causing a call between ECB President Christine Lagarde and Bessent. Some senior ECB officials reportedly viewed the move as breaking a long-standing convention among Western central banks of coordinating this kind of action, a practice dating to the postwar period designed precisely to avoid unintended currency-market side effects.

It’s a minor diplomatic issue next to Japan’s fiscal exposure, but it fits the broader pattern. An intervention conducted with limited coordination, limited transparency, and limited regard for the frameworks that normally govern this kind of policy.

So why wouldn’t they?
Politically, the July intervention did what it needed to do. It signalled action, generated a few days of favourable headlines, and it let two governments claim they’d done something about a weakening currency. Economically, however, it was close to pointless. Within a month, most of the gain had reverted, the underlying causes were untouched, and it left Japan poorer in reserves, more constrained in how it can defend its own currency, and under new pressure from Washington over its budget.

The answer to the question could be obvious; of course, you’d try to prop up a currency crashing to a 40-year low. This summer, however, shows the more honest answer is that it doesn’t work, and everyone involved should have known that going in.

Questions
If intervention rarely lasts without further changes in the economy, why do governments keep doing it? To convince the market, or to convince voters?
Was this intervention Japan asking a friend for help, or a country with limited options doing what Washington needed it to do?
What does it mean for Western alliances if allies stop informing each other about, for example interventions, before acting?

Please read the following for more information
Leo Lewis, David Keohane & Emily Herbert(2026). Japan’s borrowing costs hit 30-year high: what does it mean for global markets? The Financial Times
Brad W. Setser (2026). Why the U.S. Intervened to Prop Up Japan’s Yen. Council of Foreign Relations
Deardorff, A.V., 2000. “The Economics of Government Market Intervention and Its International Dimension,” Working Papers 455, Research Seminar in International Economics, University of Michigan.