A rare coordinated intervention by the United States and Japan to buy the struggling yen may have stabilized the currency in the short run, but international observers worry fiscal and inflationary pressures may ultimately overwhelm the effort.
William Dickens, a professor emeritus of economics and public policy at Northeastern, said the move reflects a fairly complex set of forces, from the war in Iran and the inflationary impact of the U.S. tariff regime, to domestic political uncertainty in Japan, where a weakened governing coalition has complicated decisions over how aggressively to tighten monetary policy and rein in government spending.
Dickens said the intervention appears to have worked — for now.
“But economists are of the overwhelming opinion that interventions in currency markets are a fool’s game when they are trying to prevent depreciation that is being driven by fundamentals,” he said.
Treasury Secretary Scott Bessent said Friday’s action, which involved U.S. and Japanese officials jointly purchasing yen in the foreign-exchange market, was meant to counter “disorderly yen movements,” referring to the currency’s rapid slide to a roughly 40-year low against the dollar, according to data from the U.S. Federal Reserve.
“Treasury remains attentive and in close communication with our counterparts at [Japan’s Ministry of Finance] and [Bank of Japan]. We will not hesitate to participate in further joint intervention,” Bessent wrote on X.
The U.S.-Japanese joint intervention comes as the U.S. government continues to wage a stop-and-start war against Iran that has roiled global energy markets, driving up oil prices and putting renewed pressure on Japan, which imports nearly all of its crude oil and has no domestic production, according to the International Trade Administration, a federal agency that supports U.S. export markets.
Those higher energy costs have weakened the yen and threatened to fuel inflation in one of the world’s largest economies, a prospect that experts say would drag both economies, which are deeply intertwined through trade, investment and financial markets. Japan is also the largest foreign holder of U.S. Treasury securities, with more than $1.14 trillion in holdings, according to U.S. government data.
The deeper issue for the yen, according to Northeastern University’s Fabricius Somogyi, who studies international finance, is Japan’s deteriorating fiscal position, where a massive debt load has constrained monetary policy by making higher interest rates far more costly for the government.
“The fiscal situation in Japan, the fact that the government’s balance sheet — government debt in Japan — has blown up massively over the past couple of decades,” said Somogyi, Joseph G. Riesman Research Professor.
Somogyi said the Bank of Japan has spent years buying government bonds to keep interest rates low, which in turn helps contain the government’s borrowing costs as it carries one of the world’s largest public debt burdens. Higher interest rates, he said, would make it significantly more expensive for Japan to refinance that debt.
Japan’s gross public debt is at 227.8% of gross domestic product, GDP, in 2026, by far the highest among advanced economies, according to the International Monetary Fund. Underlying the fiscal crisis is a demographic issue: Japan’s aging, shrinking population has increased government spending on pensions and healthcare while slowing economic growth and tax revenue, Somogyi said.
Dickens said that the “fundamentals are against the Yen,” noting that Japan’s comparatively low interest rates, a trade balance strained by expensive energy imports and uncertainty over future economic policy all encourage investors to favor other currencies, creating pressures that currency intervention alone is unlikely to overcome.
Japan’s low interest rates mean investors can borrow yen at relatively low cost and exchange those funds for dollars, which can be used to invest in U.S. assets with higher yields, experts say. All told, that increases selling pressure on the yen, which has contributed to its prolonged decline against the dollar.
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Those forces have driven the yen to its weakest level against the U.S. dollar in roughly 40 years, or nearly ¥164 per U.S. dollar in late July, according to Federal Reserve exchange-rate data.
Dickens said he sees one of several ways the situation resolves. As long as oil prices remain elevated, Japan will be running “huge trade deficits” that will continue to depress the currency. He said that unless oil prices fall, the United States and Japan will eventually have to either abandon the intervention, or face off against currency speculators betting the yen will continue to weaken.
“In these situations, the speculators almost always win,” he said.
Somogyi said what comes next depends on identifying the exact “root cause” of the currency crisis, but concurred that traders might get the last word.
“Making predictions is hard, of course, but I think what it’s ultimately going to depend upon is how much confidence investors have and how much confidence currency traders eventually have in this intervention,” he said.
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