The United States and Japan last week staged a coordinated intervention to halt the slide of the yen after the Japanese currency fell to a 40-year low against the US dollar.
asserted
currency → stag → dollar
While it is unusual for authorities to intervene to help prop up another country’s currency, the yen has an important role in international finance as the world’s third-most-traded currency, meaning its depreciation has repercussions far beyond Japan.
asserted
depreciation → intervene → Japan
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Here is everything you need to know about the currency intervention:
What is a currency intervention and how did the US and Japan coordinate?
A currency intervention occurs when a government or central bank buys or sells large quantities of foreign currency to help stabilise the value of its own currency.
asserted
government → show → currency
In this case, the US and Japan coordinated an intervention to lift the value of the yen after it slid to 163 against the dollar for the first time since 1986.
asserted
it → coordinate → 1986
The intervention began on July 31 when the US Treasury began selling euros for yen, while Japanese authorities also bought yen.
asserted
authorities → begin → yen
In the days after the intervention, the yen began to rise and reached 157 to the dollar on Wednesday.
asserted
yen → begin → Wednesday
The US last staged a currency intervention with Japan in 2011 when the yen began appreciating rapidly following the Tohoku earthquake and tsunami.
asserted
yen → stag → earthquake
It also stepped in to support the Japanese currency during the Asian Financial Crisis in 1998.
asserted
It → step → 1998
How did the yen get so weak?
asserted
yen → get → ?
The yen’s collapse is the result of longstanding economic challenges combined with new pressures from the US-Israel war on Iran.
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collapse → combine → Iran
Japan has struggled with economic stagnation since the early 1990s.
asserted
Japan → struggle → 1990s
The Bank of Japan has for decades attempted to stimulate growth with ultra-low and even negative interest rates, a policy that has exerted downward pressure on the yen.
asserted
that → attempt → yen
While Japan’s weak currency has helped draw record numbers of tourists and kept exports cheap, it has also placed a strain on households by raising the cost of imported goods.
asserted
it → help → goods
Tokyo has spent tens of billions of dollars since 2022 trying to defend the yen, but the economic policies of successive Japanese leaders, including current Prime Minister Sanae Takaichi, have partly offset these efforts.
asserted
policies → spend → efforts
“Takaichi wants it all: Growth, loose fiscal policy, loose monetary policy and a stable yen – but their policy mix is leading to a weak yen, which is causing an inflation problem,” Chris Turner, global head of markets at ING, told Al Jazeera.
asserted
Turner → want → Jazeera
Why does the US want a stronger yen?
asserted
US → want → yen
While Japan is a close US ally, Washington stepped in for its own benefit as much as Tokyo’s, said Masahiko Loo, a senior fixed income strategist at State Street Investment Management in Tokyo.
asserted
Loo → step → Tokyo
“Washington isn’t trying to strengthen the yen for Japan’s sake.
asserted
Washington → try → sake
It’s trying to prevent a disorderly decline that could spill over into Treasury markets, global funding conditions, and broader financial stability,” Loo told Al Jazeera.
uncertain
Loo → try → Jazeera
“A free-falling yen isn’t just Japan’s problem.
asserted
yen → fall → ?
At some point it becomes a global liquidity and financial stability issue, which is why Washington stepped in.”
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Washington → become → point
The yen is the most traded currency after the US dollar and the euro, which means dramatic changes in its value can have ripple effects across the global financial system.
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changes → trade → system
One of Washington’s biggest concerns is the prospect of Japan selling off its holdings of US Treasury securities, which were valued at $1.114 trillion in May.
uncertain
which → sell → May
If the yen continued to fall, Tokyo would be encouraged to sell large quantities of US Treasuries to raise cash it can use to defend the currency.
asserted
it → continue → currency
That would put upward pressure on interest rates in the US, raising the cost of servicing the country’s rapidly growing national debt, which already exceeds $39 trillion.
“The financial cost of intervention for the US is low and, given that President Donald Trump favours a weaker US dollar, the domestic political cost is minimal,” Shigeto Nagai, head of Japan economics at Oxford Economics, wrote in a research briefing on Monday.
“Coordinated intervention is a cost-effective method as it allows the US to do a significant favour for Japan, a precious loyal ally in Asia, and take some pressure off US interest rates.
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US → put → rates
Will the intervention work?
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intervention → work → ?
While the joint intervention has provided short-term support for the yen, Japan will need to take more fundamental measures, such as raising interest rates, to raise the value of the currency in the long term, according to experts.
uncertain
Japan → provide → experts
Japan’s benchmark interest rate currently stands at 1.0 percent, its highest since 1995 but far lower than other advanced economies, including the US.
asserted
rate → stand → US
Without a change in Japan’s low-interest-rate environment, the latest currency intervention is just “throwing good money after bad,” said Derek Tang, an economist and CEO of Monetary Policy Analytics, a US research advisory firm.
asserted
Tang → throw → Analytics
“Ultimately… the gravitational force of economic fundamentals will overwhelm intervention efforts,” Tang told Al Jazeera.
asserted
Tang → overwhelm → Jazeera
“Nevertheless, Japan seems very reluctant to tighten monetary policy to raise its own interest rates and allow the currency to appreciate in that manner,” Tang said.
asserted
Tang → seem → manner
“So this situation will persist for the time being.”
asserted
situation → persist → time
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