The United States and Japan carried out a joint currency intervention on July 31, 2026, to limit the yen’s depreciation, for the first time in nearly 30 years. The yen gained briefly after the intervention but fell again within a few days.
Associate Professor Semih Emre Çekin, a faculty member in the Department of Economics at Turkish-German University, says the development cannot be viewed solely as an exchange-rate problem specific to the Japanese economy. The yen’s decline to its lowest levels in 40 years has brought the limits of Japan’s long-standing monetary policy and vulnerabilities in global financial markets into focus.
Japan’s low-interest-rate policy
Beginning in the 1990s, Japan pursued one of the world’s loosest monetary policies to combat low growth and deflation. This process accelerated particularly after 2012, and the Bank of Japan purchased large amounts of government bonds.
In 2016, the central bank began implementing yield-curve control, a policy aimed at keeping the yield on 10-year government bonds close to zero. As a result, interest rates in Japan remained low compared with those in the United States and other developed countries, while interest-rate differentials between countries widened.
The low-interest-rate policy kept the Japanese government’s borrowing costs limited for an extended period. At the same time, carry trade transactions based on borrowing in low-interest-rate yen and investing in higher-yielding dollar- or other currency-denominated assets became widespread in global markets.
During periods when interest-rate differentials widen, foreign investors are seen selling yen-denominated bonds and the yen depreciating. Japan’s public sector also became a major participant in the global carry trade mechanism because of its expanding balance sheet.
Japan’s dilemma
Reversing this monetary policy framework does not appear easy. If the Bank of Japan raises interest rates rapidly to contain inflation and strengthen the yen, the public sector’s interest expenses increase.
Rate hikes could put pressure on public finances and the central bank’s balance sheet. Keeping rates low, however, could allow pressure on the yen to depreciate and inflation risks to persist.
For this reason, although the joint currency intervention sent a strong signal to markets in the short term, it does not by itself resolve Japan’s structural problems. The yen’s renewed depreciation after the intervention also points to this limitation.
Possible reasons for U.S. participation in the intervention
Japan has intervened in the foreign-exchange market in the past to limit excessive movements in its currency. What distinguished the latest initiative was the United States’ participation in the process.
The re-emergence of coordination last seen around 30 years ago during the Asian financial crisis has led to the assessment that the yen’s depreciation is not viewed by the United States as merely an economic problem specific to Japan.
The first risk for the United States is that the yen’s rapid depreciation could create pressure on other Asian economies to weaken their currencies in order to preserve export competitiveness. Such a process could heighten concerns about the renewed spread of competitive devaluations seen after the 1997 Asian crisis.
The second risk is the possibility that Japan could sell a significant portion of its large holdings of U.S. Treasury bonds. Such sales could place additional pressure on the U.S. bond market at a time when Treasury yields are rising.
In this context, the U.S. objective is viewed as not merely ensuring that the yen appreciates, but also limiting the effects on Asia, the United States and the global economy of a potential chain of instability among Japan’s currency, bond and interest-rate markets.
The geoeconomic dimension of financial cooperation
Competition between the United States and China continues not only through trade tariffs and technology restrictions but also through financial systems and capital flows. The yen intervention’s timing, during a period when the economic dimension of this competition has come to the fore, gives U.S.-Japan financial cooperation broader significance.
U.S. Treasury Secretary Scott Bessent said in a statement on August 3, 2026, that economic security is national security and that the United States would support its allies.
Claims that the U.S. Treasury sold euros to support the yen during the intervention and did not inform European officials about the process were also considered. These claims were suggested to be connected to the Trump administration’s approach toward Europe.
A serious shock to Japan’s financial system could create three separate risks for the United States. Regional financial confidence could be undermined, the possibility of currency wars in Asia could increase, and the withdrawal of Japanese capital from the U.S. Treasury market could raise financing costs for the American economy.
The development could also weaken one of the important pillars of the economic alliance system the United States is seeking to build against China. For this reason, the yen’s stability is being linked not only to Japan’s monetary policy but also to global financial stability and the geoeconomic balance of power in Asia.
Limited exit options
The options facing Japan entail different costs. Raising interest rates rapidly could strengthen the yen, but it could also increase the financing costs of public debt and expand losses on the central bank’s balance sheet.
Keeping rates low, meanwhile, could cause pressure on the yen and inflation risks to continue. Therefore, although the joint currency intervention provides a short-term market signal, it does not eliminate the structural problems created by nearly 30 years of monetary policy experimentation.
U.S. participation in the intervention shows that the costs of volatility in the yen’s value are not limited to Japan. The development brings global carry trade transactions, public-sector balance sheets, vulnerabilities in the U.S. Treasury market and strategic competition with China into the same framework.
