The idea of stopping the yen’s decline through a “US-Japan currency alliance” sounds appealing. But a closer look suggests that Japan may have less to gain from the arrangement than it first appears.
At the end of July, Japan and the United States carried out coordinated intervention to buy yen and sell dollars, the first such joint action to support the yen since 1998.
Atsushi Mimura, Japan’s vice finance minister for international affairs, who oversees currency policy, described the move as the “culmination” or “completed form” of the US-Japan currency alliance. But what does that actually mean?
One key element is the Federal Reserve’s FIMA Repo Facility, which allows foreign central banks and monetary authorities to obtain dollars temporarily by using their US Treasury holdings as collateral.
US Treasury Secretary Scott Bessent has proposed significantly expanding the facility and encouraging Japan to make active use of it. For Japan, this would make it easier to obtain dollars for currency intervention without having to sell large amounts of US Treasuries on the open market.
FIMA Benefits the United States
However, there is a catch. Japan would have to pay interest on the dollars it borrows.
Japan is estimated to have spent ¥11 trillion to ¥13 trillion on yen-buying, dollar-selling intervention on July 30 and 31. If it had used FIMA, it would have had to pay interest on those borrowed dollars.
The Fed’s current lending rate is 3.63%. Borrowing the money once and repaying it the next day would not be particularly costly, but repeated borrowing could result in a substantial interest burden.
By contrast, when Japan intervenes using its foreign-exchange reserves, which are invested mainly in US Treasuries, it uses its own assets and does not have to pay interest to the United States. It can also potentially benefit from exchange-rate gains.
FIMA therefore has an obvious advantage for the United States. Japan can support the yen without selling large amounts of US Treasuries, while the US earns interest on the dollars it lends.
Japan holds about $1.1 trillion in US Treasuries, the largest amount held by any foreign country. They are a cornerstone of the US financial system. A large-scale Japanese sell-off could push Treasury yields higher and, in turn, put downward pressure on stock prices.
A notable precedent dates to June 1997, when then-Prime Minister Ryutaro Hashimoto said during a visit to New York that he had sometimes felt “tempted to sell US Treasuries.” His remarks caused turmoil in financial markets and angered officials at the White House and in Congress.
From this perspective, the Trump administration has much to gain from encouraging Japan to use FIMA.
Finance Minister Satsuki Katayama speaks to reporters after revealing that the Japanese and US governments had carried out a coordinated currency intervention, August 3, Chiyoda Ward, Tokyo. (©Sankei/Shigeki Fujitani)
US Interests in Yen Stability
But the US has another reason to be concerned about the yen.
US Treasury yields should normally be pushed higher by high inflation, yet the rise in yields has been gradual. In real terms, after subtracting inflation from government bond yields, the US rate has been below 1% since April, lower than Japan’s rate of more than 1%.
One reason is that yen selling is accompanied by purchases of US Treasuries, helping to keep US interest rates in check. From this perspective, a weak yen is not necessarily a bad thing for the United States. But this situation may not last.
The United States, the world’s largest debtor nation, needs foreign investment and lending to cover its current-account deficit of well over $1 trillion a year.
Japan is one of its largest sources of foreign capital, but investment and lending from Japan have been declining. The total for the year through March was $170 billion, down sharply from $310 billion two years earlier.
The weak yen has also reduced Japan’s ability to invest overseas. The Trump administration needs enormous amounts of investment, particularly in areas such as artificial intelligence, and is counting heavily on investment from Japan.
The Risk of a Yen Reversal
The yen carry trade is another source of capital flowing into the United States. Investors obtain low-cost yen funding and invest the money in higher-yielding US assets.
But if the yen begins to strengthen, they may unwind these positions by selling dollars and buying yen to repay their yen-denominated debt. A large-scale unwind could trigger heavy selling of US assets and disrupt US financial markets.
In other words, while a weak yen can encourage capital to flow into the United States, a sudden reversal could destabilize US financial markets.
The United States therefore has reason to be wary of a prolonged, one-way decline in the yen. This gives Washington another reason to seek closer currency cooperation with Japan.
BOJ Rate Hikes
Bessent, albeit indirectly, also appears to be hoping that the Bank of Japan will raise interest rates at its next policy meeting in September.
However, since June 2025, the yen has actually weakened more rapidly even as the Bank of Japan has raised its policy rate.
The idea that raising interest rates will necessarily prevent the yen from weakening is therefore misleading.
According to eminent economist John Maynard Keynes, fiscal and monetary policy exist to serve a country’s own interests.
Bank of Japan Governor Kazuo Ueda, an economist by training, surely understands this. Hasty rate hikes aimed simply at stopping the yen’s decline could weaken domestic demand and, instead, make the situation worse.
The Takaichi administration should therefore ignore the pressure and steadily implement its growth-investment strategy to restore the strength of the Japanese economy.
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(Read the article in Japanese.)
Author: Hideo Tamura, The Sankei Shimbun
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