Washington and Tokyo Spent Months Preparing Joint Yen Defense

Early Coordination

The US Federal Reserve Bank of New York conducted rare rate checks in January to assist Japanese authorities in combating yen depreciation, according to a Japanese government official familiar with the planning. This marked one of the earliest signals that Washington was willing to consider direct participation in currency intervention alongside Tokyo.

Finance Minister Satsuki Katayama disclosed that she held approximately ten discussions with US Treasury Secretary Scott Bessent on matters including exchange rates. A May meeting in Tokyo lasted three and a half hours, including dinner, reflecting the depth of engagement between the two officials.

That May session followed Tokyo's massive solo yen-buying operation between late April and early May, which failed to reverse the currency's downward trajectory. The inability of unilateral action to stabilize the yen underscored the need for a different approach.

Converging Interests

Both nations faced distinct but complementary pressures. For Japan, a weak yen has driven up import costs, creating political headaches for Prime Minister Sanae Takaichi's administration as living expenses climbed. For Washington, yen weakness undermined the trade advantages President Donald Trump sought through tariffs, while concurrent selling in Japanese government bonds threatened spillover effects on US Treasury yields.

Bessent stated in May that Japan's fundamentals are strong and resilient, and would be reflected in the exchange rate. He also pressed for faster Bank of Japan interest rate increases, signaling concern that a slow pace of monetary tightening could leave the central bank trailing inflation.

The BOJ responded in June with a rate hike to 1 percent, a 31-year high. Yet with real borrowing costs remaining deeply negative, the move provided only temporary support for the currency.

Shifting Tactics

Atsushi Mimura, Japan's top currency diplomat, adopted a lower public profile this year compared to past patterns of daily verbal warnings. Instead, he focused on behind-the-scenes coordination with US counterparts, according to two sources familiar with the preparations. This shift kept markets uncertain about the timing of potential intervention.

The US Treasury's semi-annual currency report on July 24 echoed Tokyo's warnings about excessive yen volatility and committed to continued close consultations on exchange-rate matters. This public alignment marked a departure from historical diplomatic sensitivity around currency discussions between the two economic powers.

Execution

Mimura authorized yen purchases in the late evening of July 30, using a speakerphone connected to a handful of staff in the finance ministry's foreign exchange division. The timing caught investors outside Tokyo trading hours and coincided with the BOJ's two-day policy meeting. The yen firmed immediately to 157.80 from around 162.80 against the dollar.

When staff reported the yen sliding back toward 158, Mimura said they would reconvene the next day. On Friday, following BOJ Governor Kazuo Ueda's post-meeting briefing, the yen spiked again in what markets interpreted as another intervention, this time with American participation.

The US Treasury notified several banks that it might intervene in the yen market and instructed them to stand ready for future action, according to a source. A notepad visible in front of Bessent during a July 31 Cabinet meeting read "To Do Buy Japanese Yen (JPY) $5-10 bil," captured in a photograph.

September Expectations

The BOJ's communication last week represented its most hawkish stance to date. Ueda emphasized vigilance against upside price risks "more than ever," language analysts interpreted as all but confirming a September rate increase. The phrasing aligned with a line in the US Treasury's currency report stating that monetary normalization would help reduce excessive exchange-rate volatility.

Bessent praised the moves in a Sunday post on X, stating strong support for Japan's decisive market and monetary steps to correct substantial yen undervaluation. He reiterated backing for higher BOJ rates and announced plans to meet Ueda at a US-hosted G20 finance leaders' meeting in late August, just ahead of the BOJ's September 17-18 policy meeting.

Yuki Kimura, bond strategist at Okasan Securities, noted that given Japan moved to prevent yen declines with US cooperation, there is now a question of whether the BOJ can afford to skip a September rate hike. Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, described a September increase as nearly certain, arguing that intervention alone has only temporary effects and faster rate hikes are needed to establish a lasting floor for the currency.

The joint action represents a significant evolution in US-Japan economic coordination, with shared currency anxiety forging closer bilateral dialogue on an issue that has historically been diplomatically sensitive. Whether this cooperation translates into sustained yen strength will depend heavily on the BOJ's next moves and the trajectory of monetary policy divergence between Tokyo and Washington.