Scott Bessent fired a currency bazooka, but global finance still looks like a ‘giant Jenga tower’ propped up by a Japanese yen that’s in deep trouble

In a recent effort to bolster the Japanese yen, the United States and Japan joined forces in a currency intervention, but the move has not alleviated market concerns. Treasury Secretary Scott Bessent's notes revealed a purchase of $5 billion to $10 billion of yen by the U.S., while Japan's contribution exceeded $50 billion. The exchange rate saw a brief boost from nearly 164 yen per dollar to around 157, but has since receded and is trading near 159 on Friday.

However, these short-term measures aimed to address the symptoms rather than the root causes of the yen's weakness, which include Japan's massive debt exceeding 200% of its GDP, fiscal stimulus likely to worsen the deficit, and the central bank's reluctance to raise rates amid high inflation.

Wall Street veteran Ed Yardeni noted that the recent yen instability has triggered a "yen carry trade," where cheap yen borrowing funds bets on higher-yielding assets worldwide, raising concerns about potential market instability. The U.S.-Japan intervention has also raised questions about the dollar's dominance, with the U.S. selling euros rather than dollars to acquire yen, and Japan borrowing against its Treasury holdings instead of selling them.

This action could weaken the dollar and add to U.S. debt costs, as Japan holds over $1 trillion in U.S. Treasuries, making it the largest foreign holder of U.S. debt.

Despite cooler-than-expected U.S. inflation data, the yen's post-intervention decline persisted, highlighting the challenges faced by the currency. The Bank of Japan's reluctance to raise rates, combined with the Federal Reserve's potential for early rate hikes, contributed to the yen's slump. However, relatively tame U.S. inflation readings this week have not provided relief to the yen.

This situation is a cause for concern, as markets are unlikely to remain reliant on interventions that fail to address the underlying issues, according to Robin Brooks, a senior fellow at the Brookings Institution. He advocates for a more substantial shift in the Bank of Japan's policy, emphasizing the need for long-term yields on Japanese government bonds to rise and narrow the yield gap with U.S. bonds.