On July 31, the United States made its first foray into the currency market in 15 years to bolster the Japanese yen. At that time, the yen had plummeted to record lows, despite Japan's extensive efforts to stabilize its value.
For Washington, the yen's decline is not merely about aiding an ally. Japan is the largest foreign holder of U.S. government bonds, and fluctuations in its currency significantly affect capital flows between the two leading financial systems.
This article explores the financial symbiosis between the two nations and its impact on global liquidity flows, which in turn influences the cryptocurrency market.
Background and Economic Context
The yen's decline, like many financial crises, results from multiple factors that have exerted pressure on the currency over the years. The U.S. intervention was a logical continuation of Japan's decade-long struggle to support its currency.
Interest Rate Disparity
The primary reason for the yen's weakness is the interest rate gap between the two countries. The Bank of Japan (BoJ) has maintained near-zero rates for decades, while the U.S. Federal Reserve has rapidly tightened its monetary policy post-pandemic.
Interest rates in the U.S. and Japan. Source: LSEG.Even after the BoJ raised its rate to 1%, a significant gap remained, with the Fed's rate between 3.5% and 3.75% (approximately 275 basis points difference). For global investors, this macroeconomic environment created nearly ideal conditions for carry trades.
They borrowed the inexpensive Japanese currency to invest in high-yield assets, which necessitated continuous selling of yen, further intensifying the downward pressure on its value.
Energy Shock
Japan is heavily reliant on energy imports. Following the escalation of tensions between the U.S. and Iran in spring 2026, oil prices surged sharply.
The import price per kiloliter in Japan reached 114,076 yen ($712). This situation led to increased logistics costs, a worsening trade balance, and additional demand for foreign currency.
The weakening yen became both a cause and a driver of energy inflation, as each new import shipment became more expensive.
Capital Outflow
Japanese corporations have been reinvesting profits abroad for years without repatriating capital. Pension funds, including the largest, GPIF, actively invest in foreign assets.
The NISA program, which encourages private businesses to invest overseas, has reinforced this trend. Even now, Japanese households continue to accumulate foreign stocks rather than sell them.
At the same time, foreign capital inflow into the Japanese stock market has not compensated for the outflow, resulting in a persistent structural demand for global currencies.
The Real Interest Rate Trap
Although the BoJ raised its interest rate to 1%, this did not resolve the issue due to rising inflation.
As of the July recalibration, the inflation rate was at 1.9%, meaning the real interest rate on bank deposits stood at -0.9%.
Source: TradingEconomics.In such conditions, the currency becomes less attractive for capital placement. Consequently, carry trades remain relevant, and the yen continues to be a key funding currency for global risk strategies.
Stabilization Attempts
Initially, Japan sought to manage the pressure on the yen and its government bond market independently. The first step involved changing the strategies of the largest domestic banks.
In January, the Japanese government bond (JGB) market experienced a significant sell-off. Yields on 30-year bonds surged to a record 4.22%, while 20-year bonds reached 3.24%. This was driven by concerns about fiscal policy coupled with a reduction in purchases by the Bank of Japan.
Increase in JGB yields. Source: FUTUBULL.In response, the country's second-largest bank, Sumitomo Mitsui Financial Group, publicly announced its intention to double its JGB portfolio and began gradually buying bonds. Other financial institutions followed suit, leading to a gradual return of foreign capital to Japan.
The BoJ also participated in supporting the currency market. From late April to May, the bank spent approximately 11.74 trillion yen ($73.5 billion) on unilateral interventions.
However, the effect was short-lived. The Japanese currency continued to fall, making it evident that external intervention was necessary to stabilize the situation.
U.S. Currency Intervention
By the end of July, economic pressure had reached a critical point. The yen fell to nearly 164 against the dollar, its lowest level since 1986.
Historical USD/JPY exchange rate. Source: TradingView.Against this backdrop, Washington and Tokyo agreed to a joint currency intervention for the first time in 15 years.
On July 30 and 31, the Japanese Ministry of Finance and the BoJ conducted extensive operations, purchasing yen and selling dollars. Concurrently, the Federal Reserve Bank of New York, at the request of the U.S. Treasury, began selling euros to buy yen.
According to the Japanese government, from July 30 to August 26, these operations cost a record 15.39 trillion yen (around $96.5 billion). The U.S. portion of this total was not disclosed.
President Donald Trump publicly acknowledged U.S. involvement a few days after the intervention began, on August 3, describing it as a "gesture of friendship."
On the same occasion, Treasury Secretary Scott Bessent stated that it was a response to "disorderly volatility in the yen," and the U.S. would "not hesitate to participate in further joint interventions."
The effects of the buyback were swift. Following the officials' comments, the yen rebounded from its local lows. However, markets understood that this was merely a temporary reprieve.
JPY rebound. Source: TradingView.The fundamental causes of the yen's weakness—interest rate disparities, capital outflow, and energy dependency—remained intact. This raised questions about how Japan would finance further interventions without destabilizing the U.S. government bond market.
U.S. True Intentions
While officials claim that the U.S. provided "friendly support" to its ally, in reality, Washington was addressing its own issues.
Japan is the largest foreign holder of U.S. debt. According to the U.S. Treasury, as of the end of June, Japanese state and private investors held approximately $1.116 trillion in Treasuries.
This amount surpasses that of China ($633 billion) and the United Kingdom ($940 billion). Such a substantial stake in government bonds makes Tokyo not just an ally, but a critical component of the economy, with its stability directly affecting borrowing costs for the U.S. government, corporations, and households.
Source: Yahoo.Finance.The issue is that Japan needs dollars to finance its interventions. The most straightforward source is the sale of part of its reserves, including U.S. bonds.
Data from the BoJ indirectly confirms this strategy. By the end of August, Japan's dollar reserves dropped by a record $79.6 billion—about 6% of $1.2 trillion. Meanwhile, the volume of foreign securities decreased by $87.8 billion.
The weak yen posed additional risks to the U.S. government bond market. In August, the yield on 30-year Treasuries reached 5.34%, its highest since 2007. Simultaneously, high national debt, growing refinancing needs, and uncertain inflation forecasts were already pressuring long-term interest rates.
If Japan began to sell off Treasuries en masse, yields would rise even further. This would directly affect mortgage costs, loans, and corporate debt in the United States.
Thus, a key element of the intervention was not merely the direct purchase of yen, but the FIMA Repo Facility mechanism established by the Fed in 2020. This allows foreign central banks to temporarily exchange Treasuries held at the Fed for dollars without selling them on the open market.
In essence, Japan receives dollar liquidity as collateral, and the market does not see new bond supply. Bessent personally urged the Fed to increase the limit on this line (currently set at $60 billion) to give Tokyo more room to maneuver.
However, FIMA is merely a temporary solution. This tool provides Japan with dollars for a short duration—up to seven days—against the collateral of bonds. It does not address the underlying causes of the yen's weakness and does not negate the fact that Japanese institutional investors continue to hold substantial positions in foreign assets.
According to analysts at CMC Markets, the Fed's mechanism "smooths" the intervention but does not eliminate Japan's eventual need to sell Treasuries. It acts as insurance against acute crisis phases, rather than a structural solution.
Investor Reactions
Currency Market: After the U.S. and Japan announced their joint intervention, the USD/JPY exchange rate fell from nearly 164 to 156.5 per dollar by August 3. This marked the yen's strongest weekly gain since February.
The DXY dollar index also hit a seven-week low of 99.42 on the same day.
By August 10, the yen had returned to levels above 158, trading around 159.5 in mid-August. In September, the currency remained volatile but without critical movements.
However, the fundamental interest rate gap persisted. The yield on 10-year U.S. Treasuries remained at 4.68%, while Japan's stood at 2.84%—a spread of about 184 basis points.
As long as this difference exists, investors have the incentive to borrow in yen and invest in dollar-denominated assets, putting pressure on the currency.
Treasury Market: The most critical issue for the U.S. in this situation was protecting government debt. On one hand, the intervention was designed to prevent Japan from selling Treasuries to finance yen purchases. Instead, Washington sold euros while Tokyo accessed FIMA.
On the other hand, yields continued to rise. By August 20, the yield on 10-year Treasuries reached 4.68%, nearing a 52-week high of 4.74%, while the 30-year yield hit 5.28%.
Yield on 30-year U.S. Treasuries. Source: Yahoo.Finance.Currently, the yields on long-term U.S. government bonds hover just above 5%.
In this context, experts at JPMorgan described the buyback volume as "negligible" compared to a $32.2 trillion market. They assessed that the U.S. Treasury's actions could only temporarily ease yield pressure and do not address the structural issues creating it—primarily the high budget deficit and rising inflation expectations.
George Saravelos from Deutsche Bank viewed the bond buyback and promotion of FIMA as a "soft form of financial repression" aimed at containing the long end of the yield curve. His reasoning is that if the market is not allowed to freely adjust Treasury prices, the changes occur through dollar depreciation.
Cryptocurrency Market: The relationship here is more complex than it seems. Bitcoin's initial reaction to the intervention was negative: on August 1, the cryptocurrency fell roughly 1.25% to $63,034, as the market feared a repeat of the August 2024 scenario when an unexpected rate hike by the BoJ led to a drop from $62,000 to $49,000 within a week.
However, recent data indicate a different trend. The 52-week correlation between BTC/USD and USD/JPY reached -0.9—the most negative since late 2022, with about 81% of Bitcoin's weekly movements coinciding with USD/JPY dynamics.
Correlation between BTC/USD and JPY/USD. Source: PortfoliosLabs.These figures challenge the carry trade thesis, which suggests that yen depreciation is linked to Bitcoin and other risky assets strengthening. In CoinDesk, the situation was explained as being dependent on a common factor: the strength of the dollar.
This is why the key factor for the crypto market was not the intervention itself, but the U.S. Treasury's decision on August 19 to double its buyback of long Treasuries—from $2 billion to at least $4 billion per operation. On that day, Bitcoin surged 8.8% to around $69,800.
Analysts believe that "Bitcoin rewards not the intervention itself, but the intervention that lowers the long-term borrowing costs for the U.S." Meanwhile, the Fed's plan to assist Japan could lead to the printing of new dollar liquidity, further boosting the value of the first cryptocurrency.
Outlook
The intervention bought Japan some time, but it did not eliminate any of the yen's underlying weaknesses. The pressure on the currency will persist—the only question is when it will become critical again.
For the U.S., this means that protecting the Treasury market is shifting from a "one-time action" to a continuous challenge. The FIMA mechanism allows for the postponement of U.S. debt sell-offs, but does not eliminate the need for them.
Thus, the yen has evolved from a localized issue into a systemic factor. Its exchange rate now reflects not only the state of the Japanese economy but also the stability of the U.S. bond market, the readiness of the Fed to expand liquidity, and global investors' appetite for risk.