Besant Defends US's First Yen Purchase in 28 Years to Avoid Market Volatility, Rising US Treasury Yields and Financing Costs

According to Zhitong Finance APP, U.S. Treasury Secretary Janet Yellen has defended last month's rare intervention by the U.S. Treasury to support the yen. She stated that Japan is one of the largest overseas holders of U.S. Treasury securities, and if there are extreme and disorderly fluctuations in the yen market, it could force investors to unwind related trading positions, thereby impacting global financial markets, eventually pushing up U.S. Treasury yields and increasing financing costs for American households and businesses.

It is noteworthy that this marks the first time since 1998 that the U.S. has intervened in the forex market to buy yen. The market had previously speculated that Yellen’s move was aimed not only at stabilizing the yen, but also possibly at preventing further rises in U.S. long-term Treasury yields.

In a letter dated August 27 to Democratic Senator Elizabeth Warren, Yellen stated that Japan is a significant holder of U.S. Treasuries, so the stability of the yen market is indeed connected to the U.S. financial market. She said, "A disorderly yen market could trigger forced position unwinding, disrupting global markets, and ultimately raising borrowing costs for American households and businesses."

Yellen published this letter on social platform X on Friday.

Japan is currently the largest overseas holder of U.S. government bonds. Therefore, if the yen experiences extreme volatility, Japanese investors and global participants in carry trades could reallocate assets, with the effects rippling into the vast U.S. Treasury market.

Earlier, Treasury watchers had already linked Yellen's unusual foreign exchange intervention to her efforts to prevent further increases in U.S. Treasury yields.

Yellen did not disclose precisely how much the U.S. Treasury spent in the intervention at the end of July, but noted that the Treasury used existing foreign currency assets from the Exchange Stabilization Fund (ESF) to purchase yen. Earlier this month, she had revealed that the Treasury had used euros in this operation.

Meanwhile, the scale of Japan's intervention was even larger. According to data released by Japan on Friday, the Japanese government poured a record $96.4 billion into the forex market over the past month to support the yen.

Direct U.S. participation in supporting the yen is particularly notable, as this is the first time since 1998 that the U.S. has intervened in the forex market by buying yen.

Warren previously requested that Yellen explain the analysis and legal basis behind the Treasury’s use of the ESF for this intervention. In response, Yellen stated that the Treasury fully complied with ESF-related legal provisions. This law explicitly authorizes the Treasury Secretary, with the President's approval, to maintain orderly exchange arrangements through foreign exchange transactions.

Regarding concerns about whether the U.S. Treasury would assume Japan-related credit risk, Yellen made clear that this operation did not involve providing a loan to Japan. She said, “No credit was extended to Japan. Japan owes nothing to the U.S. Treasury. Therefore, there is no risk that Japan will fail to repay a debt that simply does not exist.”

In other words, the essence of the U.S. Treasury’s recent operation was to use foreign currency assets held by the ESF to buy yen on the market, rather than providing funding to the Japanese government. This explanation was also a key part of Yellen’s response to Warren’s queries.

Despite joint intervention by the U.S. and Japan, the yen has already given back some of its post-intervention gains. On Friday, the dollar-yen exchange rate once again broke through the 160 yen level, meaning the yen fell below 160 per dollar—the first time since the day of the intervention at the end of July.

This also shows that despite a record-scale intervention by Japan and the rare U.S. participation, market forces driving the yen weaker have not completely disappeared.

For the U.S., renewed yen depreciation is of particular concern, as if exchange rates experience sharp fluctuations again, it could reignite the unwinding of carry trades as well as changes in Japanese investors’ asset allocations, which could further transmit to the U.S. Treasury market.

The reason Yellen’s yen intervention has attracted so much attention on Wall Street is partly because she has recently been taking a more proactive stance in influencing the U.S. Treasury market.

Market participants have previously argued that stabilizing the yen could also be an indirect way to stabilize the U.S. Treasury market.

As the world’s largest overseas holder of U.S. Treasuries, changes in Japan’s domestic interest rates, exchange rates, and capital flows all have potential impacts on demand for U.S. government debt. If rapid depreciation of the yen causes Japanese investors to adjust overseas bond holdings, or if global investors are forced to unwind yen-funded carry trades, there may be selling pressure on Treasuries, pushing yields higher.

Yellen’s recent formal reply to Warren explicitly tied yen market volatility to U.S. borrowing costs, further confirming some of the market’s prior judgment: the U.S. Treasury’s rare intervention in the yen market was not only about exchange rate policy, but also included an intent to maintain stability in the U.S. Treasury market and prevent further increases in U.S. financing costs.

However, whether large-scale intervention by the U.S. and Japan can reverse the yen’s decline over the long term remains in question. With the yen once again falling below 160 per dollar on Friday, if there is another episode of disorderly exchange rate volatility, the market will be watching closely to see if the U.S. Treasury might intervene again.