A tool rarely used: historic US intervention to save the yen

The Federal Reserve worked with the Bank of Japan last week to help lift the yen, after it hit nearly 40-year lows against the dollar. Has it succeeded?

Reuters

A Japanese man walks past a screen displaying foreign currency exchange rates against the Japanese yen following the yen's collapse on 3 August 2026.

A tool rarely used: historic US intervention to save the yen

Rana Freifer

last update on 04 Aug 2026

The collapse of the Japanese yen was not a sudden event, but the culmination of a prolonged divergence between monetary policy in the United States and Japan. While the US Federal Reserve kept interest rates high, the Bank of Japan maintained a more accommodative stance, prompting investors to sell the yen and buy the dollar in pursuit of higher returns on US assets.

The rise in oil prices caused by the war with Iran also increased Japan’s energy import bill, adding further pressure on the currency, Japan being one of the world’s largest energy importers. As a result, the yen fell to its lowest level in nearly four decades. During New York trading on 21 July 2026, it passed ¥163 to the dollar for the first time since 1986, and stayed there in Asian trading on 22 July, at ¥163.21-163.24 to the dollar. This raised import costs, adding more inflationary pressures to Japanese households and businesses.

To halt the slide, the Bank of Japan decided to keep the interest rate at 1%, its highest level in 31 years, and signalled that it was prepared to continue raising rates gradually if necessary. Yet markets had expected more decisive action and saw the rate-hold as insufficient to stop the yen’s dive, so Japanese authorities intervened in the foreign exchange market, buying yen and selling dollars in New York, the first such intervention in three months.

Soon, there were signs that the intervention was not solely a Japanese initiative. Japan’s top currency official, Atsushi Mimura, hinted at US support, while US Treasury Secretary Scott Bessent said the yen “appears to be undervalued”. Days later, US President Donald Trump and Japan’s Ministry of Finance confirmed that Washington and Tokyo had worked together to support the yen—a rare move and the first of its kind since the devastating 2011 earthquake and tsunami.

Reuters — Atsushi Mimura, Japan's Vice Finance Minister for International Affairs, speaks to the media regarding joint US-Japan action in the foreign exchange market at the Ministry of Finance building in Tokyo, Japan, on 3 August 2026.

Working in coordination

It transpired that the US had bought yen and sold dollars to help strengthen the Japanese currency. Japan’s finance minister, Satsuki Katayama, confirmed that the ministry had bought yen “in coordination with the US Treasury”. Documents that later emerged indicated that the US Treasury had planned to buy between $5-10bn worth of yen while selling an equivalent amount of dollars, but the US government has been tight-lipped on the exact figures.

Japan also conducted a large-scale intervention in the foreign exchange (forex) market by buying yen and selling dollars, but the Ministry of Finance declined to reveal the size of the operation. The Nikkei newspaper suggested that the intervention had been substantial. Meanwhile, Washington provided operational support through the Federal Reserve Bank of New York.

To halt the slide, the Bank of Japan decided to keep the interest rate at 1%, its highest level in 31 years, but markets were expecting more.

Mimura said US assistance went beyond "psychological support" and included rate checks. These are calls made by the Fed to market participants to assess market conditions and are often regarded as a preliminary step towards official intervention in the currency market. It worked. The yen recovered remarkably well following the intervention, falling from ¥163 to around ¥156.7 to the dollar by 3 August, its biggest gains in months.

Some analysts argue that the joint intervention only succeeded in halting the yen's sharp decline; it did not address the structural causes of its weakness. Indeed, a sustained recovery would require the interest rate gap with the US to narrow. This, in turn, would require the Bank of Japan to continue tightening monetary policy gradually, while easing the pressures caused by rising energy import bills.

Stephen Innes of SPI Asset Management agreed that there was work still to do. "The yield differential remains wide, Japan's energy-import burden remains significant, and the Bank of Japan is still moving more slowly than the market would normally require to generate a sustained currency reversal," he said.

Emerging pattern

The US intervention followed a series of Japanese operations that began on 30 April, involving the purchase of yen and the sale of dollars, after the dollar reached ¥160.725, the Japanese currency's weakest level since July 2024. The intervention quickly pushed the dollar down to around ¥155.5. Further operations followed during the Golden Week holiday in early May, before Tokyo returned to the market on 31 July in a coordinated intervention with the US. Japan did not say how many times it intervened but that it spent ¥11.7tn ($73.5bn) intervening in April and May.

The US intervened not only to support a strategic ally but to help stabilise currency and bond markets, and limit excessive exchange rate volatility that could spill over into the global financial system. Reuters quoted Shigeto Nagai, head of Japan economics at Oxford Economics, as saying that the intervention was "a low-cost way for Washington to pay a favour to a key ally, while also protecting the stability of foreign exchange and bond markets".

Trump said it was "a signal of friendship" and "good for the world economy". The weaker dollar resulting from the intervention also makes US exports more competitive in the Japanese market. Neil Newman of Astris Advisory Japan said a weaker dollar reduces the cost of US goods priced in yen, making them more competitive in Japan.

In a report on forex policies, issued on 23 July 2026, the US Treasury called on the Bank of Japan to continue raising interest rates, arguing that the normalisation of monetary policy would help anchor inflation expectations and limit excessive exchange rate volatility. It also warned that the yen remained weak despite the narrowing interest rate gap between the two countries and described excessive currency volatility as undesirable.

Unusual situation

The latest US intervention forms part of a long but rare history of Washington using the forex market as a tool to support international financial stability. Since the creation of the Exchange Stabilisation Fund (ESF) in 1934, major US interventions have been confined to pivotal moments.

Under the Plaza Accord of 1985, the US coordinated with Japan, West Germany, France, and Britain to sell the dollar. The Group of Five (G5) countries had concluded that its excessive appreciation had deepened global trade imbalances and that exchange rates should better reflect economic fundamentals.

Two years later came the Louvre Accord of 1987, when the major industrial economies agreed that the adjustments following the Plaza Accord had largely achieved their objectives. The priority therefore shifted to maintaining exchange rate stability around the new levels and strengthening coordination between the economic policies of the major economies.

The US rarely uses currency market intervention as a policy tool, making its decision to prop up the yen all the more significant.

The US also bought the yen in 1998 to support Tokyo's plans to strengthen its economy during the Asian financial crisis, then joined the European Central Bank in 2000 to buy the euro, amid concerns that continued weakness in the European currency could have spillover effects.

Washington's history of intervening in currency markets shows how rarely it uses this policy tool. Such action is generally reserved for periods when exchange rate movements threaten broader financial stability or become increasingly detached from economic fundamentals. Seen from that angle, it explains the significance of the latest joint intervention to support the Japanese yen. It may not seem like it now, but this will be talked about in years to come.

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