Why the U.S. Treasury Is Buying Yen — and Why Takaichi Keeps Undoing It

At a cabinet meeting on July 31, a photographer caught Treasury Secretary Scott Bessent's handwritten to-do list. It read, in part: "Buy Japanese Yen (JPY), $5-10 bil." Then, within days, the U.S. Treasury actually did it — a coordinated yen-buying operation with Japan, the first since the 1998 Asian financial crisis.

That is weird. The United States, issuer of the world's reserve currency, spent its own reserves to push up a foreign currency. The official explanation is friendship: Bessent calls Takaichi "a great ally," and says the administration will do "whatever it takes" to support Japan. But look at the plumbing and the story is different. This is bond policy wearing a currency costume.

Japan is the largest foreign holder of Treasury debt, holding roughly $1.1 trillion of it. That stash is the collateral connecting the two countries' financial systems. When the yen slid this summer to a 40-year low near 164 per dollar, Tokyo's eventual answer was to sell foreign assets and buy yen — and the biggest foreign asset Japan owns is U.S. government debt. Bessent has said the stakes out loud: disorderly yen moves can force Japan to sell Treasuries and trigger forced unwinds that end up raising borrowing costs for U.S. households and businesses. It isn't hypothetical. In January, a meltdown in Japanese bonds spilled straight into U.S. Treasuries while Bessent was at Davos — a preview of the exact spillover the summer operation was designed to stop.

So look at how carefully the operation was built around the one thing the U.S. fears most: Japan becoming the world's biggest seller of its own bonds. To buy yen, the Treasury sold euros from its Exchange Stabilization Fund rather than selling dollars. And Bessent pushed the Fed to expand its FIMA repo facility — which lets a foreign central bank post Treasuries as collateral and borrow dollars — so Japan could fund a yen defense without liquidating its bonds into an already fragile market. The whole exercise exists so Japan can prop up its currency while keeping its pile of U.S. debt.

The basic point is that the yen has, in a sense, become a U.S. bond product. That is why a Treasury secretary — someone whose job is financing the U.S. government — now spends his summer defending a foreign currency.

But here is the part the headlines tend to skip: intervention props up a price; it doesn't change the thing underneath. The yen is cheap mostly because Japanese rates are low — the Bank of Japan's policy rate is just 1% even after a June hike — while U.S. rates are far higher, and the market knows that gap is the real driver. Morgan Stanley's strategists make the same point: the yen's longer-term path turns more on U.S. monetary policy than on intervention. The only durable fixes are BOJ rate hikes that narrow the gap and a Japanese fiscal policy that stops re-weakening the currency. And that is where the all-too-convenient ally is also the cause of the problem.

Takaichi's program — Bessent himself has called it "Takaichinomics" — is fiscal expansion in the Abe tradition: a big stimulus, a ¥370 trillion public/private investment drive through 2040, and a food-tax cut that would shave roughly ¥4.4 trillion a year off government revenue, all while dropping the target of a budget surplus. Markets read the spending as inflationary and the central bank as behind the curve; 10-year Japanese bond yields are near multi-decade highs, around 2.85%. A prime minister whose whole program is to spend her way to reflation is, mechanically, a force pushing the currency down. Takaichi has likewise been wary of pushing rates up too far or too fast, fearing a climb that could choke off the recovery.

Which brings us to the "less" that Bessent keeps pointing at. Back in May, with the yen sliding, his message was already that there is less room for currency intervention to be effective under Takaichi: the promised stimulus keeps pushing the currency down faster than any currency desk can push it up. The Nikkei, watching Bessent campaign for rate hikes, calls him the Bank of Japan's "shadow governor." And the result shows up in the price: the joint operation drove the yen from about 164 to roughly 155 in a matter of days; by late August it had slipped back below 160, forcing Bessent to defend the whole exercise again.

For an investor who has never traded a yen in their life, what does this mean? Three things.

First, the yen now has an official floor — and a self-interested one. Every time it breaks decisively through 160, there is a real chance both governments ride in again, because U.S. borrowing costs are what they are actually defending. That is not a bet on Japan; it is a bet on the U.S. Treasury's view of its own debt.

Second, the real decision point is September 18, when the Bank of Japan meets. Markets already price about an 80% chance of a rate hike, with another expected as soon as January. A hike is the one policy act that makes the intervention look smart — and the one that can jolt the yen sharply higher, of the sort that hits leveraged global trades built on borrowing cheaply in yen. When the yen spiked on a BOJ surprise in 2024, global risk assets sold off with it. That is a mechanism to remember, not a forecast.

Third, Japanese stocks are now a two-sided trade. The "Takaichi trade" — big fiscal spending and a cheap yen — drove the Nikkei to record highs when she won the election. Exporters love a weak yen. But a firming yen and rising Japanese yields are precisely the combination that reverses that trade, and climbing Japanese rates pressure valuations everywhere.

The cleanest way to hold all of this together is to remember the collateral. Japan's trillion-plus of Treasuries is the asset standing behind the yen rescue, which means the yen is now official U.S. policy — and it will keep being refilled as long as Takaichi keeps spending. Watch September 18. That is the day the support program either gets its policy backup, or has to be done all over again.