Brad Setser on the US's Unusual Japanese Yen Intervention

The Japanese Yen’s recent extreme weakness stems from persistent interest rate differentials between the US and Japan, compounded by speculative market pressures. While the Bank of Japan has been slow to raise rates, the Ministry of Finance’s intervention—supported by the US Treasury—aims to reestablish a floor for the currency and mitigate broader instability in Asian markets. Brad Setser, a Senior Fellow at the Council on Foreign Relations, notes that Japan’s fiscal position is stronger than many G7 peers, with a primary balance nearing surplus. The use of the Federal Reserve’s FIMA repo facility provides a strategic tool for central banks to generate liquidity without forcing immediate, disruptive sales of US Treasuries. Ultimately, the success of these interventions depends on the Bank of Japan’s willingness to normalize monetary policy and close the yield gap with the Federal Reserve.