The United States and Japan just pulled off their first coordinated currency intervention in 15 years. Now they can’t agree on what comes next.
US Treasury Secretary Scott Bessent publicly criticized the Bank of Japan on August 2 for dragging its feet on monetary policy normalization, calling the central bank “behind the curve” on inflation. The comment came hours after Washington and Tokyo jointly intervened to prop up the yen, which had cratered to roughly 164 against the dollar, its weakest level in nearly four decades.
A $36-59 billion Band-Aid
The coordinated intervention, carried out around August 2-3, saw Japan spend an estimated $36-59 billion defending its currency. The US contributed as well, making this the first joint yen-buying operation since 2011, when the two nations teamed up following the Fukushima disaster.
It worked, at least temporarily. The yen recovered to the 155-157 range in the days that followed, pulling back meaningfully from its near-40-year low.
But Bessent made clear that the intervention came with strings attached. In his view, currency market operations are a short-term fix. The real solution, he argued, is for the BoJ to actually raise interest rates, something the central bank has been reluctant to do in any meaningful way despite persistent inflationary pressures.
The BoJ’s awkward position
The BoJ held its policy rate unchanged at 0% during its July 30-31 meeting, just days before the intervention. That decision wasn’t unanimous, though. Internal divisions have become increasingly visible, with recent split votes on policy decisions signaling a faction within the central bank pushing for hawkish action.
Despite keeping rates flat, the BoJ did send hawkish signals, hinting that tightening could arrive at its next meeting scheduled for September 16-17. Analysts are increasingly pricing in a September rate hike as the most likely outcome, influenced by both the inflation data and the unusual public pressure from the US Treasury.
Bessent’s broader play
The Treasury Secretary has also called for an expansion of the Federal Reserve’s FIMA repo facility, which is currently capped at $60 billion, to ensure adequate dollar liquidity when allied central banks need to defend their currencies.
The FIMA repo facility lets foreign central banks temporarily swap their US Treasury holdings for dollars. If Japan is burning through tens of billions of dollars in intervention operations, having reliable access to dollar liquidity becomes a strategic necessity rather than a convenience.
What investors should be watching
The September BoJ meeting is now the most consequential monetary policy event on the calendar for anyone with exposure to Japanese assets. A rate hike, even a modest one, would represent a significant psychological shift for a central bank that has spent decades as the global poster child for ultra-loose monetary policy.
Japanese government bonds would likely sell off if the BoJ tightens, pushing yields higher. The Nikkei could face headwinds as well, since years of equity gains have been partly fueled by cheap money and a weak yen that boosted exporters’ earnings. A stronger yen reverses that dynamic, making Japanese exports more expensive on the global market.
For cross-border capital flows, higher Japanese rates would narrow the interest rate differential between the yen and the dollar, potentially unwinding carry trades where investors borrow cheaply in yen to invest in higher-yielding assets elsewhere. The last time a BoJ policy surprise disrupted carry trades, in the summer of 2024, it triggered a sharp selloff in risk assets globally.