But the prior interventions failed to permanently turn around the downward spiral of the yen. What’s needed: much tighter monetary policies by the BOJ.
By Wolf Richter for WOLF STREET.
There were fears Japan would have to sell US Treasury securities to raise the USD cash to buy yen, as it battles to prop up the collapsing currency. This forced selling of Treasuries would have led to a further spike in Treasury yields. And it’s Bessent’s job – as the top bond salesman in the US – to keep those long-term yields from blowing out despite whatever else is going on. To forestall this forced selling of Treasuries, all kinds of stuff happened.
The numbers remain a secret, but the move has been confirmed by both Bessent and the Japanese Ministry of Finance: The US Treasury Department via its fiscal agent, the New York Fed, and Japan’s authorities jointly intervened in the currency market on Friday to prop up the yen, which had plunged to ¥164 to the USD by July 28.
Rumors about an impending joint move had already pushed up the yen on Thursday. Then in a piece of visual theatrics, Bessent put a one-item “To Do” list in view of the cameras at the cabinet meeting at Camp David on Friday. The only item on the list was “Buy Japanese Yen (JPY) $5 – 10 bill.”
According to a leaked comment published by the Financial Times, the New York Fed sold euros in its reserves – not dollars – and bought yen with the proceeds on Friday. The use of euros instead of USD has not been confirmed yet.
The amount was not leaked. But Bessent gave an indication with his “To Do” list. At the same time, the MOF and the Bank of Japan also intervened and bought yen.
(The MOF announces the amounts of interventions monthly, with the cut-off date being around the 28th, so the amount will be disclosed at the end of August).
The rumor effect before the intervention, the theatrics, the intervention itself, and the announcement and confirmation effect resulted in a jump of the yen against the USD, from about ¥164 to the USD on Wednesday to ¥156.9 currently. This joint intervention was the big kahuna.
And both sides said that they would be ready to do it again, if needed.
Sure, but the prior interventions by Japan failed to turn around the downward spiral of the yen; they just provided temporary reprieve before the yet started spiraling down again.
Much tighter monetary policies by the BOJ – including lots of QT and much higher rates much faster – need to happen to permanently end the plunge of the yen. The yen is getting crushed by the BOJ’s crazed monetary policies from 2012 to 2022. That’s the root cause. What’s amazing is that they got away with it for so long. All monetary sins ultimately lead to the currency.
Interventions are just temporary window dressing. And the big kahuna of interventions will be tested again.
And to forestall forced selling of Treasuries by Japan, the Bank of Japan will use the Fed’s Standing Repo Facility (SRF) for Foreign and International Monetary Authorities (FIMA) instead of selling Treasuries.
At the FIMA SRF, approved foreign central banks can put their Treasury securities as collateral for USD cash. This shift to the FIMA SRF, rather than selling Treasuries, was also part of the announcement, though the BOJ has had access to the FIMA SRF for years.
The Fed announced the establishment of the FIMA SRF on July 28, 2021, when it announced its regular SRF that US banks can use. This standing FIMA repo facility replaced the temporary FIMA repo facility the Fed had created in March 2020.
And this shift to the FIMA SRF by Japan to get USD liquidity for future interventions removed pressure from the Treasury market. And Treasury yields of 2 years and longer declined this morning, with the 10-year Treasury yield falling by about 5 basis points to 4.69%, and the 30-year Treasury yield falling by about 4 basis points to 5.23%.
The yen got crushed by a decade of crazed monetary policies. But the collapsing yen, and the resulting inflationary pressures feeding into the economy via now much more costly imports (in yen terms), has forced the BOJ to back off those policies.
But the BOJ’s policy rate is still only at 1.0% after five baby-hikes spread ridiculously far apart over more than two years, and remains negative in real terms (below the rate of inflation). So this hasn’t accomplished anything. It needs to hike a lot and fast to put a floor under the yen.
In late 2024, and to its credit, the BOJ started QT that it then accelerated, reducing its balance sheet so far by about 16%, which may have slowed the yen’s downward spiral, but it wasn’t enough; it needs to go much deeper. And it needs to hike its policy rates a lot more to put a permanent floor under the yen, instead of goofing around with these currency interventions.
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“the Bank of Japan will use the Fed’s Standing Repo Facility (SRF) for Foreign and International Monetary Authorities (FIMA) instead of selling Treasuries”
Isnt this part of the trend of increasing the moneyness of US Treasuries. Similar to Stable Coins.
Does the original issuance of Treasury Debt, borrow money into existence ? And now we can also use the DEBT itself as money ?
What does this mean for definitions of money-supply ? Anything ?
1. “Isn’t this part of the trend of increasing the moneyness of US Treasuries. Similar to Stable Coins.”
No, nothing to do with it. The BOJ used the temporary FIMA facility in 2020, like other central banks. It provides them temporary dollar cash in exchange for Treasury securities. At the time, banks in other countries had trouble getting dollar cash for their clients (such as borrowers that had to service their USD debts) due to the turmoil in financial markets.
2. “Does the original issuance of Treasury Debt, borrow money into existence ?”
Issuance of Treasuries does not “borrow money into existence.” It borrows existing money from investors and spends it in the economy.
3. I don’t see how the BOJ using the FIMA SRF to sell those dollars and buy yen with for a brief intervention that then gets unwound (these are “repos”) has any lasting impact on US money supply.
What this does show is heightened worries about Treasury yields blowing out.
While I agree that the original issuance of Treasury debt doesn’t increase the global money supply, if a significant amount the dollars used to buy Treasuries comes from outside the US, the amount of dollars inside the US will increase, which could lead to increased inflation within the US. If when these Treasuries mature, if they aren’t rolled over, then those dollars could leave the US, having the opposite effect.
Wrong mechanism. Money supply is largely irrelevant for inflation; significant foreign buying of treasuries reduces the interest rate which increases investment and leads to inflation.
“…will use the Fed’s Standing Repo Facility (SRF) for Foreign and International Monetary Authorities (FIMA) instead of selling Treasuries.
At the FEMA SRF, approved foreign central banks can put their Treasury securities as collateral for USD cash. This shift to the FEMA SRF, rather than selling Treasuries, was also part of the announcement, though the BOJ has had access to the FEMA SRF for years.”
It’s almost too perfect, that errant autocorrect from FIMA to FEMA.
🤣Thanks
The Fed continues to act as an enemy of the people. They are intentionally destroying saver’s purchasing power by suppressing interest rates below the rate of inflation wherever possible. This guarantees the governments debt load / liabilities are being reduced in real terms. Meanwhile, their actions directly force the working class to stretch deeper into risk assets to try and maintain their purchasing power — which is a must if the working class wants any hope of retiring. Some people here pretend the Fed has no responsibility for the fallout when markets crash and investors suffer. Such a view is blind to the malevolant behavior of the fed.
“Some people here pretend the Fed has no responsibility for the fallout when markets crash and investors suffer. Such a view is blind to the malevolant behavior of the fed.’
Some people are always want to over-interpret and demonize. The Fed is at worst a misguided institution doing marginally more harm than good. That you want to attribute”malevolence” speaks to a victim mentality. Plenty of countries with institutions nothing like the Federal Reserve experience regular market crashes.
Yeah, stop being mead to the Fed! Quite being a bully. Everybody makes mistakes. Leave the Fed alone. They are trying their best. At least their intentions are good. I’m flush with inflating assets and am tired of hearing how the Fed is responsible for this or responsible for that. If you don’t like money, don’t use it. It’s that simple. Nobody made you use money. Cash is trash anyways. Cash is for the garbage class. It’s in the same category as payday loans. People need to take responsibility for not being lucky, in the right place at the right time, getting in while the market was hot, marrying up, having a rich dad, or getting a really cool job that pays a few hunid grand a year. Poor people wreak of desperation. I can usually smell their poorness and try to avoid them. Best not to associate with them or acknowledge them. I’m on team Fed and my stocks and properties tell me all I need to know about investing wisely.
“…the New York Fed sold euros in its reserves – not dollars – and bought yen with the proceeds on Friday. The use of euros instead of USD has not been confirmed yet.”
Isn’t this level of government intervention in currency markets the opposite of the hands-off, price-discovery approach advocated by Kevin Warsh? I wonder if KevWar is irritated by Treasury’s efforts to keep big institutions from selling off their US treasuries.
Or maybe it’s all just rhetoric and nothing has changed.
Yes, for the US, these interventionist actions (Argentina last year) are new. Using the SPR to push down global oil prices falls into the same category, but under the energy subcategory. The free markets died, long live the free markets? 🤣🎉
That we did it for domestic politics rather than good monetary policy is pretty wild.
Somehow…I don’t think we would have intervened if they had an administration like Brazil’s current administration.
this time it’s different.
What are the downsides to the US for this move, I keep getting mixed answers? I can’t wrap my head around sterilized and unsterilized currency interventions, but from what I can tell we’re going to be having more of them…
In this deal, when the NY Fed sold euros (if confirmed), the US took no risks other than switching the currency risk to the yen from the euro.
The US is meddling in the currency markets, but that’s not really a downside risk per se. The SNB has been doing that forever.
Stupid, offensive name, not funny. Grow up. Surprised Mr. Richter lets you use it.
Can the BOJ hike aggressively, considering how much debt they have?
They have to choose: blow up the yen or hike. They can afford to hike, but they have adjust fiscal policy to reflect that.
The interest rate of long-term debt increases only when the debt issues mature and are refinanced at a higher rate. So it takes many years for higher interest rates on long-term debt to become interest payments.
I don’t know what is Japan’s current budget to guess whether a government can survive fiscal cuts. I do wonder if that is realistic, considering where they are demographically. Old folks vote and they are getting very old.
Since their preferred solution, human robots!!, seems to be decades away, I wonder if they will finally relent and allow some (gasp) immigration.
Japan’s fiscal budget over the last few years wasn’t that bad, and the debt to GDP ratio actually declined quite a bit.
but the new prime minister wants to open the spigot again, and that’s when the Japanese bond market got spooked.
Japan these days has basically a single growth driver — tourism, mostly fueled by how cheap Japan has become for foreigners.
A weak currency helps this — they don’t care much about the population getting poorer.
Wolf,
Over the past several months, one of the recurring themes in your articles has been that long-term Treasury yields are increasingly being driven by market forces rather than simply by the Federal Reserve. That has me wondering:
If you had to assign approximate weights to the major forces influencing long-term Treasury yields today, how would you allocate them among:
– Federal Reserve policy
– Global investors
– U.S. fiscal realities
– Inflation expectations
– Economic growth expectations
And ny other factors you believe deserve significant weight
I realize they overlap and can’t be measured precisely, but I’d be interested in your judgment regarding which forces currently have the greatest influence and how that ranking has changed over the past decade.
Thank you for consistently helping readers understand the Treasury market.
I would assign random weights… except the last item on the list, I don’t think it plays much of a role, though the Fed likes to cite it.
I think the Fed is interested in market stability. This intervention was not to stabilize a disorderly market. The Yen-Dollar exchange rate was pretty normal, but was approaching a thresh hold of 163 Yen to the dollar, and Bessent said the Yen was undervalued. He was in effect saying the Markets are wrong and He is Right (or more likely the Omniscient Trump is Right). The markets were saying the Yen was correctly valued given Japan’s fundamentals (e.g. higher oil prices, higher deficits). Post intervention, i.e. today, the Yen is showing signs of weakening again. Mr. Market will have the last word unless BOJ and Bessent keep trying to maintain an unsustainable Dollar-Yen interest rate differential and the Strait of Hormuz stays closed. The Fed raising interest rates (probably soon) will force that differential even higher, encouraging more arbitrageurs in the Carry trade. What does Bessent plan to do about that, other than front-run such trades himself (when he pauses intervention) and make a bundle? All of this seems to me pure ad hoc (i.e. Trumpian) economic policy. Trump loves twirling the dials (tariffs, sanctions, export controls, interventions, wars), and now has to move more dials to counteract the blowback effects of other stupid decisions. Add it all together, and he’s like a child with a toy he doesn’t understand. His advisors just cheer him on.
Is this intervention also a possible reason for the drop in the 10 year with the possibility of Japan dumping their USA treasuries ?
Seems Post GFC and Post COVID the the entire monetary system has been augmented/re-architected so that when there is even a whiff of trouble someone is running out and sticking their finger in the dike.
How the hell is the system supposed to correct itself. All these band-aid fixes are essentially telegraphing the the peons that the currencies will be debased always.
I actually almost hope something goes off the rails there is way to much leverage and gambling in the system – as per Michael Green’s recent note.
Seems everything is just rigged to go up.
Well, this is what the voters asked for when they said “we want more jobs!” and voted against incumbents if the stock market took a dip.
Political candidates responded by promising more and more government intervention in markets. Now we’re to the point where the government has equity stakes in numerous companies, and are collaborating with foreign countries to nudge exchange rates.
What’s really odd is watching the Fox News crowd rail against socialism while being the socialists.
Chris B., you’ve bought the lies of CNBC, the NyTimes, the WSJ, Bloomberg, and all the others, hook, line and sinker.
The average American does not vote against incumbents if the stock market drops. If unemployment rises, some might, sure, but if a bubbled stock market is all it took for incumbents to be elected, Trump would have been re-elected in 2020, and Harris would have been elected in 2024.
The average American has some money in a 401k, but not even close to enough to live off of, meaning they’re more concerned with inflation than they are stocks.
Lots of stuff goes down. Just not the stuff we WANT to go down!.😁
“What this does show is heightened worries about Treasury yields blowing out.”
The other rumor circulating is that the Gulf States are actually the ones “begging for a stop” to the Trump/Israel war on Iran. Supposedly they told the US: If we can’t sell Oil the we can’t buy US arms or support our countries so….we will have to sell Treasuries.
Given the long end is at multi decade highs and ready to “blue sky” the yields, Trump et. al. are being gently coerced into some murky waters by selling Euros, Letting Japan us the Repo and for a cherry, trying to find an exit from the disastrous Iran war. The Emperor has no clothes.
It’s like one of those Saturday morning movie serials we REALLY old dudes used to watch. You’d get a Movie and a western or sci-fi shorty for maybe 15 minutes then a cliffhanger end….come back next Saturday! The Bond market is alike a rumbling volcano beginning to swell. Can King Trump stop it? Will Sir Bessent save the Day? Will the gallant Warsh pull off a miracle? Tune in next week!
“we will have to sell Treasuries”
lol, those stupid rumors that you’re dragging into here. I should just delete this crap. Do your rumor-mongering somewhere else. The Gulf states are small-scale holders of Treasuries. Here are the top two. Each holds minuscule portions of the US debt and of the $9.4 trillion with a T of total foreign holdings:
Saudi Arabia is #17 of the top 20 holders: $140 billion, about 1.4% of foreign holders.
UAE is #19 of the top 20 holders: $119 billion, about 1.2% of total foreign holders.
Japan holds 8 TIMES as much as Saudi Arabia and 10 TIMES as much as the UAE
What do those numbers mean in the context of daily volumes? Even a slight shift in supply or demand could shift interest rates.
Lol no. Or more accurately, only in the very short term.
Wolf – what’s the reason the BoJ hasn’t already hiked rates in the manner in which they should to stem JPY depreciation?
It can’t be that they’re concerned about unrealized long term JGBs collapsing because that’s already happened, eg 30yr JGB etc. – so what’s reason to delay the rate hikes on short term gov debt? Does short term debt affect the market differently in Japan than in the US?
Thanks
They went through 10 years of the crazed monetary policies of Abenomics, including huge QE, ZIRP, NIRP, YCC, et al. If took a new head of the BOJ to move the BOJ away from Abenomics. The BOJ’s policies from 2012-2022 destroyed the yen. So now you want the BOJ to save the yen? Free money and negative interest rates are addictive for politicians. All this stuff is toxic for the human brain, and those involved and those anywhere near them cannot even think anymore. They just turn into zombies.
It goes farther back than 10 years.
My recollection is around 2000 the BOJ and its advisor Paul Krugman began to engineer the “new” monetary policy of ZIRP.
They were the first to ZIRP and now they are the first to blow up.
The Fed followed their policies to an extent……drove rates to .25 .
The first to go is a precursor to the others……us!
Another bailout. The Bessent “put.”
Why doesn’t Japan raise their interest rates to protect the yen? Not sure, but I think it has to do with the “Cary trade”. They borrow cheap yen in Japan and put it into the u s stock and bond market. Increasing interest rates in Japan could end that scam and hurt the u s markets.
If Warsh raised rates Japan could raise rates. But Warsh let Bessent handle it and crazy that the markets didn’t blink, except a little relief in rates.
Warsh didn’t raise rates. For all his bold talk against inflation he’s now voted twice to keep rates steady. How is he getting credit when he’s done nothing?
Japan won’t raise rates to protect the yen for the same reasons that KevWar won’t raise rates. It’s all about fear of a recession EVER happening.
The Fed chair CANNOT dissent. They’re finished if they dissent because it shows that they cannot build a majority. Their job is to build a majority. If they cannot persuade others to come to their view, then they have to vote with the majority.
I have explained and re-re-re-re-explained this to YOU many times already, and you keep regurgitating this same BS. I’ve run out of patience.
But why? They can’t be removed during their terms, so they can be unpopular.
What’s to stop someone like Warsh from getting up there, voting for an increase, and in his dissent statement, “We really need to raise rates, but my foolish colleagues are more concerned with their stock portfolios than the jobs they’re supposed to do.” They could be embarrassed into either resigning or caving.
I don’t see why the Fed has to be cordial while, for example, the Supreme Court, does not.
Like I said, a Fed chair who dissents on a monetary policy vote is finished. They’re finished with Wall Street, they’re finished with their own colleagues, they’re finished globally, they’re finished with the credibility in being able to accomplish a majority.
There was only ONE Fed chair that ever dissented: Marriner Eccles, at the meeting in December 1938. And even he did NOT dissent on a current monetary policy decision but on a vote on structural changes to the Fed’s balance sheet.
It doesn’t matter one iota if YOU can see that or not. That’s just how it is, and people cannot come into here and over and over again troll the comments with bullshit about Warsh not dissenting.
I have replied to this BS way too many times. It’s the same people that keep saying the same stuff.
Because what’s the point of being a leader no one listens to? Sure, he probably can’t be removed, but if he can’t convince the board to do anything, he’s useless.
Would it be wrong or misguided to tie US support for these moves to be tied to at least a small increase in their rate, or do the moves actually strengthen our position and therefore, we can’t insist on any quid pro quo?
Would be interesting to know what Bessent said behind closed doors to his Japanese counterparts, and whether they agreed or whether they just politely nodded their heads. But the BOJ decides on rate hikes, not the MOF.
These blatant market interventions destroy the very notion of the free market. Even if a treasury sell off could be averted without propping up the yen, it shouldn’t even be an excuse for the US to help the BOJ. Call me old fashioned, but it’s time to let the chips fall where they me be. Let the market do the work.
Mr. Wolf writes: “Sure, but the prior interventions by Japan failed to turn around the downward spiral of the yen; they just provided temporary reprieve before the yet started spiraling down again.”
From this statement, the Treasury is buying high; if in similar circumstances the yen still went down in the past. Therefore, Japan is spreading its monetary loss policies from the Japanese central bank interest rate repression. The future losers being the USA proletariat. Just like the movie: “Margin Call” when the finance company unloaded it’s worthless paper securities.
The Treasury isn’t spending USD to buy YEN. It’s spending its EUR holdings to buy YEN, swapping one foreign currency for another. The EUR was a lot lower than today over the years, and in the early years much lower. The Treasury might be selling its EUR high to buy YEN.
But it’s really irrelevant. There’s going to be YEN in the reserves now instead of EUR. That’s about the only difference.
Reverse carry trades. The perfect foundation for a colossal house of cards ponzi.
The Japanese zombie companies can not pay their interest. Under the bus the rest of us go. How long will it take for all the sand to run out to sea?
I wish you’d be a little more thoughtful on how you address the correct monetary approach for nations like Japan.
Clearly the “crazed” policies of the Abenomics years were undertaken with clear goals–namely encouraging economic growth and riding shotgun, inflation. Clearly they didn’t generate growth or inflation in proportion to outlays, but it’s hard to model out the counterfactuals here.
As more and more nations resemble Japan (I’m in Milan at the moment and the similarities are striking), what exactly are these countries supposed to do in your view? Some Hayekian “strategy” of just allow businesses to fail until some natural floor emerges? What if the countries don’t have the social stability that would allow this? A lot of this tone of criticism tends to sound a lot like armchair quarterbacking without a clearer thesis on why the policy was “crazy” and what should have been done instead.
” A lot of this tone of criticism tends to sound a lot like armchair quarterbacking without a clearer thesis on why the policy was “crazy” and what should have been done instead.”
William McDonald, it’s really more of “Look over there, nothing to see here” obscuration. The water runs out of the bathtub, but it’s not happening if you don’t notice it, until that little vortex at the end.
“Crazed” was a crass understatement. They were insane braindead miscalculated idiotic stupid-ass monetary policies that contributed to destroying the wealth of the Japanese households. Now they cannot even afford to travel overseas anymore. Their wages are minuscule compared to US wages.
Abenomices was a combination of three “legs.” Two of them, they implemented massively: crazed monetary policy and horrendous fiscal deficit spending (with monetization of the debt by the BOJ).
The third leg were economic reforms, and they largely lagged. One of the big reforms that they never even attempted was to annihilate the wage-setting oligopoly that has given Japan decades of wage repression. The labor market should have been pried open to competition, where companies have to compete with each other to hire and keep workers, instead of applying wages set behind closed doors and agreed to by consensus. This is still a huge issue. The primary economic problem in Japan is structural wage repression. It was also the primary reason inflation was so low and deflation set in for some of the time. But that wasn’t always the case. Back in the early to mid-1990s, Japan still had high wages, but the wage repression was already setting in. They all wanted to get cheap labor – and the policy was for exports. But high wages are hugely important for an economy.
Just when I planned my trip to Japan they pull out the rug.
160 plus please!
They are desperately buying time.
When you have $1T of interest expenses (compared to other federal expenses) it simply means the empire is squeaking.
In my opinion, people abroad are much more aware of this dangerous situation.