The US Joins Japan to Intervene in the Yen: Selling Euros, Not Dollars, and Betting on a BOJ Hike
The US Treasury has unusually joined Japan in intervening in the yen, selling euros rather than dollars and drawing on the FIMA repo facility. Brad Setser argues the intervention works as long as the Bank of Japan raises rates, and that Japan's fiscal position is far better than America's.
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The argument · tap a timestamp to hear it
What the BOJ fears isn't inflation, it's a return to deflation
The Bank of Japan is raising rates slowly, with its short-term policy rate around 1%, while inflation has long been above that level. Its concerns include: not wanting to end the hard-won 2% inflation target prematurely and slip back into a zero-rate deflationary economy; and, on the technical side, that rate hikes push up bank deposit costs while banks hold large amounts of low-yielding assets, potentially hitting the banking system. There is also a market view that rate hikes raise government financing costs, though Brad thinks that worry is somewhat overstated.
— Brad SetserEast Asia piles up global surpluses, yet its currencies weaken
Global trade surpluses are concentrated in East Asia. South Korea's current account surplus is set to rise from $100 billion to $300-400 billion, and Taiwan's surplus will reach 25%-30% of GDP, yet their currencies are broadly weakening. Taiwan's central bank has guided the New Taiwan dollar lower through regulatory loosening, while in South Korea a stock market rally triggered foreign ownership concentration limits, causing foreign investors to sell Korean equities and capital to flow out, compounded by pension outflows — a "good news turns into bad news" trap. The yen's weakness stems more from extremely low interest rates.
— Brad SetserThe US is stepping in to save the yen, but what it really wants to save is Treasuries
Traditionally, weak East Asian currencies hurt US manufacturing, especially autos, but Bessent did not stress that. What concerns him is the overall pressure that yen weakness puts on Asia's currency system and the potential shock to the Treasury market. If the BOJ intervenes by selling Treasuries, it would add to pressure on Treasuries. A joint US intervention both supports the yen and reduces the need for Japan to sell Treasuries, thereby protecting the Treasury market.
— Brad SetserSelling euros, not dollars, is a way of saying this has nothing to do with the dollar
The US sold euros rather than dollars partly because Bessent, a former FX trader, wanted to "have some fun," but the more important signal is that this is not a view on the dollar's exchange rate but a purely yen-focused operation. By selling euros, the US shows it still supports a strong dollar while avoiding a direct dollar sell-off that markets could misread. It also makes the operation more flexible — for instance, conducting rate checks in the euro-yen market to create a surprise effect.
— Brad SetserJapan would rather borrow against Treasuries than sell them, but the facility is too small
The FIMA repo facility lets foreign central banks use Treasuries as collateral to obtain dollars from the Fed, avoiding outright Treasury sales. Brad was a proponent of this tool, arguing it can prevent the Treasury market from falling into a selling spiral during stress. But its rate is above market, and its size cap of about $60 billion may limit its effectiveness. Still, for Japan's Ministry of Finance, which holds high-coupon old bonds, using FIMA may be more advantageous than selling, because it keeps the bonds and earns the spread.
— Brad SetserAmerica's intervention ammunition can't sustain an exchange rate target
The US Treasury's own ammunition is limited: the Exchange Stabilization Fund (ESF) holds about $20 billion in foreign currency and $20 billion in cash, plus roughly $160-170 billion in SDRs, but it is not unlimited. Setting a yen exchange rate target would require cooperation from Japan's Ministry of Finance and institutions like the GPIF — for example, adjusting pension investment guidelines so they hedge FX risk. But setting a fixed target is very risky: once the world changes (an oil price shock, a Fed rate hike), it may have to be abandoned.
— Brad SetserWhether the intervention works all depends on a September hike
Brad argues that if the Bank of Japan raises rates in September, the intervention will work; otherwise it will face a test. He rebuts Adam Posen's view that intervention is ineffective, pointing out that the yen is already severely oversold and fundamentals are improving: oil prices are not high, Japan's current account surplus is 5% of GDP, and long-term rate differentials have narrowed. The key is changing market expectations, and the Japanese government, as the largest holder of foreign exchange assets, has an enormous influence on the exchange rate through its behavior.
— Brad SetserShorting the yen means going long the worse fiscal position
Japan's fiscal position is far better than the market perceives: its primary balance (excluding interest) is already balanced and even trending toward surplus, better than the US, UK, France and Germany. Although rising rates increase the interest burden, the Japanese government holds huge overseas assets whose returns can offset part of the cost. Net debt has been falling for five years, while US net debt will soon catch up. Brad argues that shorting the yen and going long the dollar is effectively going long US fiscal policy — and the US fiscal position is the worse one.
— Brad SetserIn their own words · checked verbatim
I think it will be enough if the Bank of Japan is going to raise rates and maybe raise rates several times. I think the only reason why it wouldn't be enough if the Bank of Japan is going to raise rates.
Brad Setser26:33
Just always remember Japan is selling dollars at by between eighty and one hundred depending on when they bought it, and somewhere around one sixty. This and the worst you can say this operation. It reduces gross debt in a really big way.
Brad Setser37:45
Figures
| BOJ short-term policy rate | about 1% | 4:06 |
| Taiwan current account surplus as share of GDP | 25%-30% | 7:13 |
| Japan current account surplus as share of GDP | 5% | 9:17 |
| Japan foreign exchange reserves | about $1.2 trillion | 9:17 |
| Japanese government pension foreign assets | more than $900 billion | 9:17 |
| Japan GDP | about $4 trillion | 9:17 |
| FIMA repo facility size cap | about $60 billion | 19:29 |
| US Exchange Stabilization Fund (ESF) foreign currency assets | about $20 billion | 23:30 |
Glossary
- FIMA Repo Facility
- A Fed facility that lets foreign central banks use Treasuries as collateral to obtain dollars, avoiding outright Treasury sales.
- ESF
- The Exchange Stabilization Fund, the US Treasury's pool of money for FX intervention, limited in size.
- Primary Balance
- Government revenue minus spending (excluding interest), a measure of fiscal health.
- Carry Trade
- Borrowing in a low-rate currency (such as the yen) to invest in higher-yielding assets and earn the spread.
- Big Mac Index
- A purchasing power parity comparison based on the price of a McDonald's Big Mac, used to gauge currency valuation.
How to listen
Investors watching currency markets and Treasuries, macro strategists, central bank watchers, and anyone studying Japan's economy and fiscal policy.
The closing chit-chat between the two hosts (after roughly 38:47) can be skipped.