The yen’s decline to its lowest levels in 40 years has reopened debate over Japan’s monetary policy and the resilience of global financial markets. The United States and Japan jointly intervened in the foreign exchange market on July 31, 2026, to limit the yen’s depreciation, marking their first such action in nearly 30 years.
The yen gained value briefly after the intervention but weakened again within a few days. Associate Professor Semih Emre Çekin of the Department of Economics at Turkish-German University says the development cannot be viewed solely as an exchange-rate problem specific to Japan.
A prolonged period of low interest rates
Since the 1990s, Japan has pursued one of the world’s loosest monetary policies to combat weak growth and deflation. The approach accelerated particularly after 2012, while the Bank of Japan purchased large amounts of government bonds.
In 2016, the central bank introduced yield curve control, aimed at keeping the yield on 10-year government bonds close to zero. Interest rates in Japan remained lower than those in the United States and other advanced economies, widening interest-rate differentials between countries.
This structure helped carry trades spread across global markets, with investors borrowing in low-interest yen and investing in higher-yielding assets denominated in dollars or other currencies. Foreign investors have sold yen-denominated bonds during periods when interest-rate differentials widened, creating downward pressure on the yen.
Japan’s public sector also became an important actor in the global carry trade mechanism because of its expanding balance sheet.
Japan’s monetary policy dilemma
Reversing this arrangement carries high costs for Japan. If the Bank of Japan raises interest rates rapidly to curb inflation and strengthen the yen, public-sector interest expenses increase.
Rate hikes could put pressure on public finances and the central bank’s balance sheet. Keeping rates low, however, could prolong downward pressure on the yen and sustain inflation risks.
For this reason, although the joint foreign exchange intervention sent a strong short-term signal to markets, it cannot resolve Japan’s structural problems on its own. The yen’s renewed depreciation after the intervention also points to this limitation.
Why Washington joined the intervention
Japan has previously intervened in the foreign exchange market to limit excessive movements in its currency. The distinguishing feature of the latest move was the United States’ participation.
The reappearance of coordination last seen nearly 30 years ago during the Asian financial crisis suggests that the United States did not view the yen’s depreciation solely as an economic problem belonging to Japan.
For the United States, the first risk is that a rapid decline in the yen could pressure other Asian economies to weaken their currencies to preserve export competitiveness. Such a development could heighten concerns that the competitive devaluations seen after the 1997 Asian crisis might spread again.
The other risk is that Japan could sell a significant portion of its large holdings of U.S. Treasury securities. 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 not only to support the yen but also to limit the impact 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 is continuing not only through trade tariffs and technology restrictions but also through financial systems and capital flows. The yen intervention’s timing, amid a period when the economic dimension of this competition has come to the fore, gives broader significance to U.S.-Japan financial cooperation.
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 linked to the Trump administration’s approach to 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 risk 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 an important pillar 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.
The cost of the options is high
Each option facing Japan carries a different cost. Raising interest rates rapidly could strengthen the yen, but it could also increase the financing cost of public debt and enlarge losses on the central bank’s balance sheet.
Keeping rates low could allow pressure on the yen and inflation risks to persist. Therefore, although the joint foreign exchange intervention provides a short-term market signal, it does not eliminate the structural problems created by nearly 30 years of monetary policy experimentation.
The United States’ participation in the intervention shows that the costs of yen volatility do not remain within Japan’s borders. The development brings global carry trades, public-sector balance sheets, vulnerabilities in the U.S. Treasury market and strategic competition with China into the same framework.
