The Zhitong Finance App learned that US Treasury Secretary Bezent defended the US Treasury's rare action last month to support the yen. He said that Japan is one of the largest overseas holders of US Treasury bonds. If the yen market experiences extreme and disorderly fluctuations, it may force investors to cancel related trading positions, which in turn will impact the global financial market, and ultimately drive up US Treasury bond yields and financing costs for American households and businesses.
Notably, this is the first time since 1998 that the US has intervened in the foreign exchange market to buy yen. The market has previously speculated that Bezent's move is not only intended to stabilize the yen, but may also be related to preventing further increases in US long-term treasury bond yields.
In a letter to US Democratic Senator Elizabeth Warren on August 27, Bessent said that Japan is an important holder of US treasury bonds, so the stability of the yen market is not unrelated to the US financial market. He said, “The disorderly Japanese yen market may cause forced liquidation of positions, thereby disrupting the global market and ultimately increasing the borrowing costs for American households and businesses.”
Bezent published the letter on social networking platform X on Friday.
Japan is currently the largest overseas holder of US government bonds. Therefore, extreme fluctuations in the yen may cause Japanese investors and global arbitrage participants to readjust their asset allocation and affect the huge US Treasury bond market.
Treasury observers have previously linked Bezent's unusual foreign exchange intervention to his attempt to prevent further increases in US Treasury yields.
Bezent did not say exactly how much money the US Treasury Department invested in the intervention at the end of July, but said that the Treasury Department used the existing foreign currency assets of the Exchange Stability Fund (ESF) to buy yen. He revealed earlier this month that the Ministry of Finance used euro assets in this operation.
At the same time, Japan's intervention was on a larger scale. According to data released by Japan on Friday, the Japanese government has invested a record 96.4 billion US dollars in the foreign exchange market over the past month to support the yen.
The direct involvement of the US in supporting the yen is particularly interesting because it is the first time since 1998 that the US has intervened in foreign exchange to buy yen.
Warren previously asked Bezent to explain the analysis and legal basis behind the Treasury Department's use of the ESF to carry out this intervention. In response, Bezent said that the Ministry of Finance has fully complied with ESF related laws and regulations. The law clearly authorizes the Minister of Finance to maintain orderly exchange rate arrangements through foreign exchange transactions after obtaining approval from the President.
In response to questions from the outside world about whether the US Treasury bears credit risks related to Japan, Beisent made it clear that this action was not to provide loans to Japan. He said, “No credit has been provided to Japan. Japan does not owe any money to the US Treasury. As a result, there is no risk that Japan will be unable to repay a debt that doesn't exist at all.”
In other words, the US Treasury's operation essentially uses foreign currency assets held by ESF to buy yen on the market instead of providing financing to the Japanese government. This explanation was also an important part of Bezent's response to Warren's questions.
Despite previous joint actions between the US and Japan, the yen has already recovered some of its gains after the intervention. On Friday, the dollar broke through the 160 yen mark once again, meaning that the yen fell below 160 against the US dollar, the first time since the intervention day at the end of July.
This also shows that despite Japan's record-breaking intervention and America's rare participation to support the yen for a while, the forces driving the yen's weakening in the market have not completely disappeared.
As far as the US is concerned, the renewed weakening of the yen is particularly noteworthy, because if the exchange rate fluctuates sharply again, it may re-trigger the liquidation of arbitrage transactions and changes in the asset allocation of Japanese investors, which will further spread to the US treasury bond market.
One important reason why the US Treasury intervention in the yen has received great attention from Wall Street is that Bezent has recently taken more active measures to influence the US Treasury bond market.
Market participants have previously believed that stabilizing the yen may also be an indirect means of stabilizing the US Treasury bond market.
As the world's largest overseas holder of US Treasury bonds, changes in domestic interest rates, exchange rates, and capital flows will have a potential impact on demand for US bonds. If the rapid depreciation of the yen causes Japanese investors to adjust their positions on overseas bonds, or if global investors are forced to cancel arbitrage transactions funded in yen, it may cause pressure to sell off US bonds, thereby driving up US Treasury yields.
However, in his official response to Warren this time, Bessent clearly linked fluctuations in the yen market to US borrowing costs, which further confirmed some of the market's previous judgments. The US Treasury's rare intervention in the Japanese yen market this time is not only an exchange rate policy issue, but also includes considerations for maintaining the stability of the US Treasury bond market and preventing further increases in US financing costs.
However, there are still doubts about whether large-scale US and Japanese intervention can reverse the trend of the yen in the long term. As the yen falls below 160 to $1 again on Friday, the market will keep a close eye on whether the US Treasury may act again if the exchange rate fluctuates in a disorderly manner again.