Japan and America Should Join Forces to Fight Financial Globalization
The American Conservative · R · trust 34/100
To restore economic sovereignty, something more than currency intervention is required.
Loading the Elevenlabs Text to Speech AudioNative Player... “This is the completed form of the Japan-U.S. currency alliance.”
So declared Atsushi Mimura—Japan’s vice minister of finance for International Affairs and the top official supporting Finance Minister Satsuki Katayama on exchange rate policy—during the coordinated Japan-U.S. currency intervention (specifically, the purchase of yen and selling of dollars) carried out in July. The intervention, which was the work of Katayama and U.S. Treasury Secretary Scott Bessent, was the first such joint action in approximately 28 years.
Japan’s exchange rate against the dollar had hovered around the 103–110 yen range from about 2016 until 2021, when the yen began to weaken. By the time of the intervention earlier this summer, the yen had fallen to the 163-yen-to-the-dollar level—a historic low not seen in 39 years.
Many market participants have pointed out that the primary reason for this depreciation of the yen is the low level of interest rates in Japan compared to other advanced economies. During and immediately after the second Shinzo Abe administration (2012–20), Japan maintained an ultra-loose monetary policy to escape deflation. For a time, the policy interest rate in Japan was at or below 0 percent. However, in recent years—and in line with other countries—Japan began gradually raising its policy interest rate. The rate hikes started in earnest in 2024 to combat inflation. Monetary authorities had also attempted unilateral interventions on several occasions to prop up the currency as rates rose, but failed to halt the rapid depreciation of the yen.
Following the coordinated U.S.-Japan intervention in July, the dollar-yen exchange rate temporarily shifted toward a stronger yen and a weaker dollar, reaching the 155-yen-to-the-dollar level. However, as the yen soon thereafter resumed its slide, it remains unclear what the long-term effects of the intervention will be. One-time adjustments cannot hide the fact that there are deeper, structural issues underlying the recent weakness of the currency.
If the yen continues to depreciate, prices in Japan will rise further, raising costs for ordinary Japanese people. Rising inflation leads to higher long-term interest rates, which in turn cools the Japanese economy, further harming average citizens. Seen in this light, Bessent’s yen rescue might appear to be a welcome act.
Indeed, President Donald Trump described the recent coordinated intervention between Japan and the U.S. as a “signal of friendship” toward Japan. At first glance, the intervention would seem to be just that, a helping hand extended by a friend during a time of need. In reality, however, the U.S. stands to gain even more from this measure than Japan does.
America’s Achilles’ heel is its federal government debt. That debt has now reached $40 trillion, with annual interest payments amounting to $1 trillion. Even Trump, who wields immense power on the global stage, cannot overcome the bond market forces that tend to exert selling pressure on U.S. Treasuries. His ambitions regarding reciprocal tariffs and the acquisition of Greenland have already been forced into postponement or revision, due—at least in part—to warning signals from the market.
Furthermore, with the prospect of having to issue yet more debt to fund its war on Iran, the U.S. fears that a weak yen and rising long-term Japanese interest rates could have spillover effects on its own interest rates and financial markets. While a weak yen reflects weaknesses in the Japanese economy, the U.S. also faces vulnerabilities that make it impossible to ignore the situation. The truth is that the U.S. decided to undertake this coordinated intervention to protect its own economy, not that of Japan.
Typically, when Japan intervenes in the foreign exchange market to correct a weak yen, it does so by selling off its holdings of U.S. Treasuries. This, however, carries the risk of driving up U.S. Treasury yields—an outcome the U.S. is keen to avoid. If Japan were to sell off Treasuries in order to support the yen, then the market might perceive limits on the available intervention funds, potentially weakening the intervention's overall impact.
Consequently, Bessent proposed a mechanism by which the Federal Reserve would lend the dollars that Japan needs to fund its yen-buying interventions. This would appear to be a step that could lead to further steps in the future. The reason is that, typically, a “currency alliance” implies an arrangement—such as the mutual provision of funds—designed to keep the exchange rate between two nations within a specific range.
It is worth noting that by lending dollar funds to Japan under this framework, the Fed would earn interest income, an approach characteristic of the Trump administration’s business-oriented mindset. Conversely, Japan would incur a new interest payment burden. Furthermore, since this arrangement involves the Fed supplying dollars to the market, it would generate a monetary easing effect for the U.S., thereby aligning with Trump’s desire to see the Fed lower interest rates. Through this move, the U.S. would gain leverage over Japan and further expand its influence on Japan’s financial and economic landscape.
For the Trump administration, which aims to revitalize domestic U.S. industries, an excessively strong dollar is far from desirable. During negotiations sparked by Trump’s imposition of tariffs on many countries worldwide, the Japanese government agreed to invest $550 billion in the U.S. economy. The U.S. financial sector has already begun moving to lend the necessary funds to Japan for this purpose. The flipside is that Japan’s procurement of the massive dollar funds required for such an investment would itself contribute to a weaker yen and a stronger dollar.
Globally, there is growing concern regarding the weakening of the…
Read the original at The American Conservative →
Open in TruthVane →