Japan’s government battles to support yen amid undervaluation concerns

Japan just pulled out a weapon it hasn’t used in nearly three decades. In late July, Japanese authorities coordinated with the United States on a rare joint intervention in foreign exchange markets, selling approximately $59 billion in US dollars to prop up a yen that had cratered to nearly 164 per dollar. The last time Tokyo and Washington teamed up like this was 1998, when the Asian financial crisis was rearranging the global economic furniture. The intervention worked, briefly. The yen strengthened to around 157 per dollar before gravity reasserted itself, with the currency drifting back to 158-159 by mid-August. For a $59 billion effort, that’s a sobering reminder of how difficult it is to fight structural currency trends with brute-force market operations. Why the yen keeps sinking The yen’s decline is not a mystery. It’s a story about interest rate differentials, and it’s been playing on repeat for years. While the Federal Reserve has maintained relatively elevated rates, the Bank of Japan has been far more cautious about tightening monetary policy. That gap makes the dollar a more attractive place to park capital and fuels the carry trade, where investors borrow in low-yield...