The United States-Japan intervention to back the yen garnered attention not only for its impact but also for those it excluded. The intervention was not a coordinated action by the major economies, but rather a bilateral action. “A coordinated global show of force was replaced by a transactional bilateral deal, weakening the effort and further dimming hopes of any grand bargain on exchange rates”, Reuters columnist Mike Dolan wrote.
Both U.S. Treasury Secretary Scott Bessent and Japanese Finance Minister Satsuki Katayama have publicly disclosed the reason and also mentioned their readiness to intervene again if the yen slides again. Therefore, the Yen has held its recovery from the multi-decade low of 164 per dollar. However, the decision to undertake the process without the other G7 members left some questions unanswered.
Unresolved Questions in the Markets
The first question is about the direction of Japanese monetary policy. Markets remain curious about whether the Bank of Japan will back the intervention with more aggressive interest-rate hikes. Another question focuses on American worries over the U.S. Treasury market.
As the largest foreign holder of Treasuries, Japan faced the possibility of having to sell some of those holdings to finance a prolonged campaign of dollar sales at a time of elevated bond-market volatility. The U.S. mitigated bond-market instability by routing dollars to Japan through Fed repos and selling euros to shore up the yen. Even if the common objective was to reverse the excessive yen weakness at levels not experienced in 40 years, the absence of the rest of the G7 should be explained.
A Bilateral Approach Takes Shape
This U.S-Japan intervention highlights a separate agreement within the G7 members, suggesting a pullback from the earlier multilateral approach.
Historical precedents highlight the utility of those frameworks. In 2011, a devastating earthquake and tsunami caused the yen to spike dangerously, prompting a unified G7 response to sell the currency. Prior to that, the last joint yen-buying operation occurred in 1998 during the Asian financial crisis, before the euro was introduced. Following the market disruptions after the attack on September 11, the three main G7 central banks responded together with liquidity in 2001.
The early struggles of the euro provide an instructive historical parallel. Persistent declines against the dollar and yen following its 1999 launch finally forced the European Central Bank (ECB) to intervene in late 2000. That campaign started with the joint G7 purchases of the euro, enabling the ECB to proceed and eventually stabilize the new currency. In the new case, other members of the G7 countries were not present. The United States conducted sales of euros for yen without the presence of Europeans. An ECB spokesperson declined to comment, and contact between the ECB and the Federal Reserve appears to have occurred only after the operation, said Mike Dolan.
Institutional Responses and Official Language
The International Monetary Fund, which monitors exchange-rate policies and external imbalances, did not make any comment. The French-hosted summits and finance talks of the G7 this year marginalized any discussion of exchange-rate coordination beyond the usual language of excessive volatility found in communiqués since 2017. “We also reaffirm our existing G7 exchange rate commitments,” the Evian G7 summit conclusions on the global economy and global trade imbalances stated in June. The language suggests minimal discussion even as the yen neared multi-decade lows.
Regional Pressures on Falling Yen
Yen’s further depreciation would also drag down the currencies of other trading partners, such as the South Korean won, as these economies try to maintain competitiveness against Japanese exporters. The Chinese yuan plays the most prominent role in that regional context, but is not part of the G7. Any wider discussion would await the G20 meeting scheduled for Miami later in the year.