Treasury Secretary Scott Bessent stood before an audience at Southern Methodist University and essentially told the entire currency trading world to come at him. “I am the house now,” he declared, claiming he holds “asymmetric information” about Japanese policy and daring investors to take the other side of the yen trade.
The intervention that started it all
Bessent’s bravado didn’t materialize out of thin air. In late July, the US executed its first yen-buying intervention since 1998, coordinating with Japan to stabilize the currency after it had weakened dramatically against the dollar. The USD/JPY exchange rate had climbed to nearly 164 before the operation.
Japan threw serious weight behind the effort, spending a record $96.4 billion to support its own currency.
Since the intervention, USD/JPY has dropped to around 153, a move of roughly seven percent in the yen’s favor.
Bond buybacks add another layer
The yen comments weren’t the only market-moving signal from the Treasury. Coinciding with Bessent’s speech, the department announced plans for expanded repurchases of longer-dated US bonds, with operations sized at $5 to $6 billion.
The carry trade recalibration
Bessent’s comments carry particular significance for the massive yen carry trade that has been a defining feature of global markets for years. The mechanics are straightforward: borrow in yen at Japan’s rock-bottom interest rates, convert to dollars or other higher-yielding currencies, and pocket the difference. When the yen strengthens, however, those positions can unwind violently. The seven-percent yen appreciation since the intervention has already inflicted pain on leveraged carry traders.
The 1998 precedent, the last time the US bought yen, came during the Asian financial crisis and the Long-Term Capital Management blowup. That the two governments felt conditions warranted a repeat nearly three decades later speaks to the severity of the imbalances that had built up.