US-Japan Yen Intervention Since 1998 Faces Rate Gap Hurdle

First U.S.-Japan yen-buying intervention since 1998 lifted the currency from a 40-year low, but rate gaps may limit the rally.

The U.S. Treasury and Japan's Ministry of Finance intervened jointly to buy yen for the first time since 1998, lifting the currency from a 40-year low near 164 to 155.21 per dollar.

"The joint intervention is certainly historic and significant, and could certainly play an important role in the short-term in clearing out yen shorts," said Michael Wan, senior currency analyst at MUFG Bank.

Japan's Finance Minister Satsuki Katayama confirmed the coordinated action on Monday, saying Tokyo and Washington would not hesitate to intervene again. U.S. Treasury Secretary Scott Bessent said the operation "countered disorderly yen movements" and supported Japan's "decisive market and monetary steps to correct the substantial undervaluation of the yen." The New York Fed sold euros and bought yen through Goldman Sachs and Morgan Stanley on Friday, while a Reuters photograph showed a notepad in front of Bessent at a Camp David Cabinet meeting reading "Buy Japanese Yen (JPY) $5-10 bil."

The intervention comes as the Bank of Japan held its benchmark rate at 1 percent on Friday in an 8-1 vote, well below the Federal Reserve's 3.5-3.75 percent target range. Derivatives markets now price roughly 40 percent odds of a quarter-point BOJ hike in September, up from about 30 percent at the start of the week.

The last time Washington and Tokyo bought yen together was 1998 at the height of the Asian Financial Crisis. In 2011, the two countries — along with other G7 members — sold yen to weaken it after the Tohoku earthquake. Historical episodes show joint intervention has typically occurred around key turning points in USD/JPY, but the trend has not always broken immediately. In June 1998, USD/JPY fell from 146 to 136 within days after joint intervention, but it took two more months before the longer-term trend shifted. In February 1995, the pair fell from 100 to 80 before eventually rising back to 100.

Bloomberg estimated Japanese authorities may have spent about 8.45 trillion yen ($53.7 billion) on Thursday alone, which would be the largest single-day intervention on record. Combined with the 11.7 trillion yen spent from late April through late May, Japan's total intervention this year would reach about 18 trillion yen ($114.4 billion), exceeding the previous annual record of 15.3 trillion yen set in 2024.

Rate Gap and Fiscal Concerns Limit Intervention's Reach

The yen's weakness stems from the wide U.S.-Japan interest rate differential, which encourages investors to borrow yen cheaply and buy higher-yielding dollar assets — the so-called carry trade. Japan's Finance Ministry said it could use the Federal Reserve's Foreign and International Monetary Authorities Repo Facility to obtain dollars by temporarily pledging U.S. Treasury holdings, easing concerns about running short of intervention funds.

Prime Minister Sanae Takaichi's expansionary fiscal agenda — including a planned cut in the food consumption tax to 1 percent from April 2027 — has raised concerns about Japan's debt trajectory. Wan said the fundamentals "likely still need to change for a more durable move lower in dollar/yen," citing "still low real interest rates, and concerns by the market around the fiscal spending trajectory of the government."

Paul Mackel, global head of FX research at HSBC, said more rounds of coordinated intervention could occur, and the European Central Bank could join. "If it were to intervene as well, this would look like an implicit currency accord to strengthen the yen," he said. Michiyoshi Kato, senior adviser at Sumitomo Mitsui Trust Bank, said additional intervention could push the dollar below 155 yen. Evercore ISI strategists Marco Casiraghi and Lu Gang cautioned that intervention without support from interest rate policy would probably have a relatively short-lived effect.

The coordinated action marks a shift in Washington's approach to currency markets, with the U.S. Treasury actively defending the yen for the first time in nearly three decades. If the BOJ accelerates rate hikes — faster than markets currently price — the intervention could mark a genuine turning point for USD/JPY. If not, the yen's relief rally may prove temporary, with the carry trade reasserting itself as the dominant force in the pair.

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