At the end of last week, the US Federal Reserve sold large quantities of euros to the US Treasury, which subsequently used the proceeds to buy Japanese yen. The Japanese government and the Bank of Japan were purchasing yen at the same time.
At first glance, this extraordinary joint intervention may look like an attempt to rescue Japan’s currency. In reality, the United States is also protecting its own financial interests.
Japanese banks, insurers and pension funds are among the largest foreign holders of US government debt, with hundreds of billions of dollars invested in Treasury bonds. If the yen continued to fall sharply, the Bank of Japan could be forced to raise interest rates much more aggressively – with serious consequences for Washington.
Higher yields at home could encourage Japanese investors to sell US bonds and bring their money back to Japan.
