The Japanese Yen: Could It Become the Weak Link in the Global Financial System?

The United States and Japan carried out a joint currency intervention to support the Japanese yen for the first time in three decades, but the move did little to ease anxiety in currency markets. According to notes from Treasury Secretary Scott Bessent, the US bought between $5 billion and $10 billion worth of yen, while Japan's intervention exceeded $50 billion. As a result, the dollar/yen rate strengthened from 164 to 157, though part of that gain was later erased, with the rate drifting back to around 159 by Friday.

Experts note that these efforts to prop up the yen were a short-term fix addressing the currency's weakness rather than its root causes. Japan's public debt exceeds 200% of GDP, fiscal stimulus is expected to widen the deficit further, and the central bank has been slow to raise interest rates even as inflation runs high.

The fact that yen instability was enough to trigger a joint US-Japan intervention suggests that one of the key pillars of the global financial system now looks considerably riskier. Wall Street veteran Ed Yardeni put it this way: "Traders are now watching for the possibility that the 'yen carry trade' — a strategy of borrowing cheaply in yen to bet on higher-yielding assets around the world — could blow up. The current financial system looks like a giant Jenga tower with the yen as its base block."

The method of intervention raised additional concerns: rather than selling dollars to buy yen, the US sold euros, while Japan, instead of selling off its reserves of US securities, borrowed against them as collateral. This suggests the dollar's dominant status is being called into question, and that the Trump administration fears the unstable yen could further worsen an already difficult US debt picture. Japan holds more than $1 trillion in US securities, making it their largest foreign holder — so any reduction in these reserves could push up US bond yields and further increase the cost of servicing US government debt.

Yardeni notes that other Asian countries could also start selling US securities, though they are in a far stronger position now than during the 1998 Asian financial crisis. Still, the risk persists: "The decades-old assumption that Asian central banks will keep buying US debt indefinitely is now coming back to bite Washington," he writes.

Robin Brooks, a senior fellow at the Brookings Institution, points out that the yen's renewed slide after the intervention came despite US inflation figures coming in lower than expected — which should have reduced the odds of a near-term Federal Reserve rate hike. In an article titled "The Yen Is in Deep Trouble," Brooks called for a fundamental policy shift at the Bank of Japan, arguing that long-term government bond yields need to rise to narrow the gap with US rates, which in turn requires the central bank to scale back its bond-buying.