Bessent Yen Warning Backs Record ¥15.4 Trillion Intervention

US Treasury Secretary Scott Bessent warned traders that shorting the yen against his push to strengthen it will fail, as a record ¥15.4 trillion intervention lifts the currency to its strongest since February.

"Bessent has also repeatedly said that the yen has weakened too much, so the U.S. probably shares that view and that's why it's cooperating with Japan," said Atsushi Takeda, chief economist at Itochu Research Institute.

The yen gained as much as 1.4 percent to ¥154.06 per dollar on Monday, topping the rally that followed the intervention campaign, after weakening to ¥160.39 last week. Tokyo's holdings of foreign securities fell $87.8 billion at the end of August from a month earlier, close to the scale of the intervention, which the Finance Ministry confirmed ran to a monthly record ¥15.4 trillion ($98.6 billion) through Aug. 26. Market participants estimate roughly 70 percent of Japan's foreign reserves sit in U.S. Treasurys, and the price of 10-year notes at the end of August was only slightly below the end of July, suggesting valuation changes accounted for a small portion of the decline.

The stakes extend beyond the currency. Japan's foreign currency reserves fell $94.6 billion to $995 billion at the end of August, still ample for further action, but selling Treasurys to fund intervention collides with Bessent's focus on Treasury-market stability ahead of the U.S. midterm elections. He has doubled the size of longer-dated debt buybacks for two months through Nov. 4 to keep a lid on yields.

Carry Trades Face Official Headwinds

Bessent's challenge, delivered in a public warning that his market operations carry insider backing, marks a shift in Washington's posture toward the yen. The U.S. stepped into the market on July 31 in the first coordinated move with Japan to support the currency since 1998, and the two governments have stayed aligned since. That backing has upended the carry trade, where investors borrowed cheap yen to buy higher-yielding assets; with official policy now leaning against yen weakness, leveraged funds face the risk of forced unwinding.

The WSJ dollar index fell 0.08 percent to 94.91, extending pressure on the greenback as the yen's strength rippled through currency markets. The last time Washington joined Tokyo in defending the yen, in 1998 during the Asian financial crisis, the currency strengthened sharply over the following months as intervention was reinforced by policy tightening.

BOJ Path Now Priced In

Bessent's call in North Carolina for higher Japanese interest rates, echoed by Bank of Japan officials, has pushed markets to fully price a rate hike at the September meeting. Some investors are weighing whether the central bank could accelerate tightening after a series of hawkish signals, which would reinforce the yen's gains independent of intervention.

Japan retains options beyond selling Treasurys. Finance Minister Satsuki Katayama has suggested Tokyo could tap the Foreign and International Monetary Authorities Repo Facility, which allows access to up to $60 billion per day without selling Treasurys, limiting the impact on U.S. yields. There is no record of Japan using the facility, and economists view the comments as a signal of ample resources rather than a plan to draw on it.

"Japan still has room to intervene given the amount of securities it holds, but given comments from Bessent, selling U.S. Treasurys to fund further intervention could end up attracting pressure from the U.S.," said Akari Nishimura, economist at the Japan Research Institute. "That would make it difficult for the ministry and the Bank of Japan to act going forward."

This article is for informational purposes only and does not constitute investment advice.