US supports yen for first time in 15 years: is the US government bond market under threat?

The US and Japan conducted their first joint operation in support of the yen since 2011. However, there is no reason to speak of an impending collapse of US government debt: the intervention is primarily aimed at stabilizing the currency market, although Japan's actions are indeed important for the US Treasury market.

Japanese Finance Minister Satsuki Katayama is expected to officially announce on Monday, August 3, that Tokyo and Washington have jointly intervened in the currency market. Two Japanese officials told Reuters about this.

The operation did not begin on Monday: yen purchases were already conducted late last week, and one source told the agency that the intervention is ongoing.

These joint actions are the first since 2011, when the Group of Seven countries coordinated currency operations after the devastating earthquake and tsunami in Japan.

How the US supported the Japanese currency

According to the Financial Times, the US Treasury bought yen on Friday through the Federal Reserve Bank of New York. Goldman Sachs and Morgan Stanley were used to conduct the transactions.

The US side sold euros from its own foreign exchange reserves and used the proceeds to buy yen. This made it possible to support the Japanese currency without directly selling dollars.

The exact volume of the US operation has not been officially disclosed. From a photo of US Treasury Secretary Scott Bessent's notebook, Reuters journalists noticed a note about a possible yen purchase of between $5 billion and $10 billion. However, this note does not confirm the actual size of the already conducted transactions.

Based on data from the Bank of Japan, Japan may have spent up to $58.97 billion on supporting its currency during Thursday's intervention alone.

After the operations, the dollar exchange rate fell to about 157.6 yen. Before that, the US currency approached the 164 yen mark — the highest level since 1986.

Why the yen came under pressure

The weakening of the Japanese currency was driven by rising prices for imported energy, increased demand for the dollar, and the difference between the interest rates of the US and Japan.

The Bank of Japan kept its key rate at 1% per annum on July 31. One board member proposed raising it to 1.25%, but the majority voted to maintain the current policy.

The regulator also signaled that it could continue raising rates if inflation risks intensify. A weak yen increases the cost of importing fuel and food, thereby further driving up domestic prices.

How are American bonds involved?

Japan remains the largest foreign holder of US government bonds. According to the latest available data from the US Treasury, in May, Japan's portfolios contained $1.143 trillion in Treasury securities.

In a month, the figure decreased by about $66.8 billion: in April, Japan’s holdings stood at nearly $1.21 trillion. The United Kingdom ranked second with $948.6 billion, and China third with $659.3 billion.

Selling American bonds can provide Japan with the dollars needed to buy yen. At the same time, large-scale Treasury sales can reduce the price of the securities and increase their yields, which raises the cost of new borrowing for the US government.

However, there is still no confirmation that the entire recorded dynamics of Japan’s portfolio is directly linked to foreign exchange interventions. The size of holdings is also influenced by the redemption of securities, changes in their market value, bank activities, and normal reserve management.

Moreover, Japan can obtain dollar liquidity without selling off Treasury bonds — through a special Federal Reserve mechanism for foreign central banks. Therefore, the link between supporting the yen and a massive sell-off of US debt is not automatic.

Is the US government debt really threatened with collapse?

The US government bond market is under pressure. The yield on the 10-year Treasury rose from 4.19% in early January to 4.75% by July 31. A rise in yields indicates an increase in the cost of new borrowing and a gradual increase in budget expenditures for debt servicing.

Total US government debt, according to the latest Treasury data as of July 22, amounted to approximately $39.64 trillion, of which about $31.87 trillion was held by investors and holders outside federal agencies.

This creates a long-term budget risk, especially if high interest rates persist. But the current currency intervention itself does not signal an impending default or collapse of the US debt market.

Treasuries remain the largest and most liquid government bond market in the world. Even foreign states collectively own only a part of the US debt, while significant volumes are held by US investors, pension funds, banks, the Federal Reserve, and US government funds.

The main risk lies not in a single operation by Japan but in the combination of rising debt, high interest rates, and possible declining demand from major buyers. The joint yen support shows that the US prefers to avoid sharp currency moves that could force Japan to use its dollar assets more actively.

Based on materials from: Reuters, Financial Times, US Treasury on Treasury holders, US Treasury on the size of government debt, Bank of Japan