Bessent defends the U.S. buying yen for the first time in 28 years, aiming to avoid market turmoil that could raise U.S. Treasury yields and financing costs.

U.S. Treasury Secretary Janet Yellen defended the rare move by the U.S. Treasury last month to support the yen. She stated that Japan is one of the largest foreign holders of U.S. Treasury bonds, and if the yen market experiences extreme and disorderly fluctuations, it could force investors to unwind their positions, thereby impacting global financial markets and ultimately raising U.S. Treasury yields as well as the financing costs for American households and businesses. Notably, this marks the first intervention by the United States in the foreign exchange market to buy yen since 1998. Prior to this, the market had speculated that Yellen's actions were aimed not only at stabilizing the yen but also at preventing a further rise in U.S. long-term Treasury yields. In a letter to U.S. Democratic Senator Elizabeth Warren on August 27, Yellen indicated that Japan is a significant holder of U.S. Treasury bonds and thus, the stability of the yen market is intertwined with U.S. financial markets. She said, An unruly yen market could trigger forced liquidations, disrupting global markets and ultimately increasing borrowing costs for American families and businesses. Yellen disclosed this letter on the social media platform X on Friday. Currently, Japan is the largest foreign holder of U.S. government bonds. Therefore, if the yen experiences extreme volatility, it may lead Japanese investors and global carry trade participants to adjust their asset allocations, which could affect the massive U.S. Treasury market. Observers of the Treasury had previously linked Yellen's unusual foreign exchange intervention to her efforts to prevent U.S. Treasury yields from rising further. Yellen did not disclose the specific amount of funds that the Treasury Department deployed in the intervention at the end of July, but she stated that the department used existing foreign currency assets from the Exchange Stabilization Fund (ESF) to buy yen. Earlier this month, she revealed that the Treasury utilized euro assets in this operation. Meanwhile, the scale of intervention by Japan has been even more substantial. Data released by the Japanese government on Friday showed that it spent a record $96.4 billion in the foreign exchange market over the past month to support the yen. U.S. participation in supporting the yen is particularly noteworthy, as this is the first time the U.S. has engaged in buying yen since 1998. Warren had previously asked Yellen to explain the analysis and legal basis behind the Treasury's use of the ESF for this intervention. In response, Yellen asserted that the Treasury fully complied with the legal provisions related to the ESF. This law explicitly authorizes the Secretary of the Treasury to maintain orderly exchange arrangements through foreign exchange transactions with presidential approval. Addressing concerns about whether the U.S. Treasury assumes any related credit risk from Japan, Yellen clarified that this action does not constitute a loan to Japan. She stated, No credit has been extended to Japan. Japan does not owe the U.S. Treasury any funds. Therefore, there is no risk of Japan not being able to repay a debt that does not exist. In other words, the essence of the U.S. Treasury's operation this time is to use the foreign currency assets held in the ESF to buy yen in the market, rather than providing financing to the Japanese government. This explanation is also a critical part of Yellen's response to Warren's questioning. Despite coordinated actions by both the U.S. and Japan, the yen has retraced some of its gains since the intervention. On Friday, the dollar once again breached the 160 yen mark, indicating that the yen fell below 160 against the dollar for the first time since the intervention at the end of July. This also suggests that, despite the record scale of Japan's intervention and the rare involvement of the U.S. to support the yen, the forces driving the yen weaker have not completely dissipated. For the U.S., the yen's renewed weakness is particularly concerning, as further drastic fluctuations in the exchange rate could trigger forced liquidations of carry trades and changes in Japanese investors' asset allocations, further transmitting impacts to the U.S. Treasury market. The high level of attention on the U.S. Treasury's intervention in the yen can be attributed to Yellen's recent efforts to take more proactive measures to influence the U.S. Treasury market. Market participants have previously believed that stabilizing the yen could serve as an indirect means of stabilizing the U.S. Treasury market. As the largest overseas holder of U.S. Treasury bonds, Japan's domestic interest rates, exchange rates, and shifts in capital flows can have potential impacts on demand for U.S. Treasuries. If a rapid depreciation of the yen leads Japanese investors to adjust their overseas bond positions, or if global investors are forced to unwind carry trades financed in yen, this could create selling pressure on U.S. Treasuries, thereby pushing U.S. Treasury yields higher. Yellens official response to Warren explicitly linking yen market fluctuations to U.S. borrowing costs further validates some of the previous market assessments, reinforcing that the Treasurys rare intervention in the yen market is not solely about exchange rate policy, but also involves considerations of maintaining the stability of the U.S. Treasury market and avoiding further increases in U.S. financing costs. However, whether large-scale U.S.-Japan interventions can fundamentally alter the trajectory of the yen remains in question. With the yen once again falling below 160 against the dollar on Friday, if the exchange rate experiences disorderly fluctuations again, the market will closely monitor whether the U.S. Treasury may take further action.