Bezent defends that the US bought yen: investing only in “symbolic” capital, strengthening the yen is beneficial to US exports and the US debt market

The Zhitong Finance App learned that US Treasury Secretary Bessent said on Tuesday that the US Treasury previously took coordinated action with Japan, used only a “symbolic” scale of capital when buying yen, and defended this rare intervention in the foreign exchange market. He stressed that a stronger yen is in America's own interests, not only beneficial to US exports, but also reduces Japan's need to sell US dollar assets to interfere in the foreign exchange market, including potentially reducing its holdings of US debt.

“A stronger yen is beneficial to US exports; a stronger yen also means that the Japanese government does not need to sell US assets in order to finance foreign exchange intervention,” Beisent said at the US House Financial Services Committee hearing on Tuesday.

The US Treasury joined forces with Japan to buy yen on July 31. At that time, the yen had fallen to its lowest level against the US dollar in about 40 years. Since then, the Japanese government has invested a record amount of money to interfere in the foreign exchange market to prevent further depreciation of the local currency by selling US dollars and buying yen, and related operations may involve the sale of US Treasury bonds.

Since Japan is still the largest overseas holder of US treasury bonds, the potential selling pressure on US debt brought about by Japan's large-scale intervention in the foreign exchange market has also become an important reason for the US side to pay attention to this issue.

Bezent: The US only invested “symbolic” capital but successfully released policy signals

Bessent said that the US Treasury only needs to invest a very limited amount of capital to show support for Japan's exchange rate policy to the market. “With only a symbolic amount of money, we can send a signal of support for Japan's policies,” Bezent said at the hearing.

According to market watcher estimates, the capital used by the US Treasury to buy yen this time is significantly less than 1 billion US dollars. By contrast, the Japanese side intervened on a much larger scale. From the end of July to the end of August, Japan spent a record amount of 96.4 billion US dollars to buy yen.

Bessent also revealed that although profit is not the goal of this operation, the US Treasury has now obtained tens of millions of dollars in revenue through this yen transaction.

Judging from the scale, the symbolic significance of this US action is clearly greater than actual capital investment. Compared to the scale of Japan's intervention of nearly 100 billion US dollars, the US invested less than 1 billion US dollars, but the direct participation of the Ministry of Finance in buying yen itself has already sent a clear policy signal to the foreign exchange market.

A stronger yen is in the interests of the US and can reduce the pressure on Japan to sell US bonds to interfere in the foreign exchange market

This time, Bessent further explained the logic of America's participation in interfering with the Japanese yen. First, the appreciation of the yen means that the dollar falls back against the yen. The price competitiveness of US products compared to Japanese goods is expected to improve, so a stronger yen is beneficial to US exports. Second, when Japan's currency depreciates sharply, it usually needs to sell dollar assets and buy yen to intervene in exchange rates. Since Japan has huge reserves of US Treasury bonds, if the scale of intervention continues to expand, the market may worry that Japan will sell some US bonds to raise funds in US dollars.

Japan is the largest foreign holder of US government bonds, and changes in its asset allocation may have an impact on the US Treasury bond market. Therefore, for the US, stopping the disorderly decline of the yen involves not only the exchange rate and trade, but also the stability of the US bond market and America's own financing costs.

In response to Democratic Senator Warren's question about this intervention last month, Bessent said that disorderly fluctuations in the yen market may cause investors to be forced to close their positions, which in turn will impact the global financial market and ultimately drive up the borrowing costs of American households and businesses.

Bezent continues to urge the Bank of Japan to raise interest rates, and the central bank ushered in a key meeting this week

In addition to directly participating in foreign exchange market intervention, Bezent has also hinted many times in recent weeks that he hopes the Bank of Japan will provide more continuous support for the yen through interest rate hikes. His previous statement showed that his judgment on the direction of Japan's monetary policy was also one of the factors the US Treasury Department took into consideration when deciding to participate in the Japanese yen intervention.

The Bank of Japan will hold a monetary policy meeting this week. After the yen previously fell to a decades-long low and Japan and the US joined forces to intervene in the foreign exchange market, whether the Bank of Japan would further tighten monetary policy has become the focus of attention in the global market.

If the Bank of Japan raises interest rates further, the huge interest rate spread that has existed for a long time between Japan and the US is expected to narrow, thereby reducing the attractiveness of investors to carry out arbitrage transactions by borrowing low-interest yen and high-yield dollar assets, and providing fundamental support for the yen.

“Now I'm the bookmaker”! Bezent warns traders not to easily short the yen

Previously, Bezent even directly warned traders who were betting that the yen would continue to depreciate. “Now I'm a bookmaker,” he said at an event at Southern Methodist University in Texas last week. So, when we intervene in the yen, I have quite a deep understanding of the Japanese side, what actions the Bank of Japan will take, and what Japanese policy makers will do.” He later added, “If you want, you can bet on working with me.”

This statement shows that the US Treasury's participation in the yen intervention this time may not be simply a one-time market operation, but is closely related to Bezent's judgment on Japan's subsequent monetary policy.

As the Bank of Japan enters a policy meeting this week, the market focus is also gradually shifting from the previous direct purchase of yen by the Japanese government to whether the Bank of Japan can further support the exchange rate through interest rate hikes.