An explainer of the Yen - Dollar situation with the help of ChatGpt
The key point is that buying US Treasury bonds does not directly protect the yen. The protection comes from what Japan does with those bonds when the yen is under pressure.
Here is the chain.
1. Japan has large dollar reserves Japan has accumulated about $1.2 trillion in US Treasuries over decades because of its trade surplus and foreign exchange reserve management.
2. The yen weakens Suppose USD/JPY rises from 140 to 180. The Bank of Japan or Japan's Ministry of Finance may decide this decline is too rapid.
3. Japan needs dollars to intervene To strengthen the yen, Japan enters the foreign exchange market and:
Sells US dollars.
Buys Japanese yen.
Buying yen increases demand for the currency, which tends to raise its value.
4. Where do those dollars come from? They already own many dollars in the form of US Treasury bonds. They have two choices:
Sell some Treasury bonds for cash dollars.
Borrow dollars against those Treasuries through facilities such as the Fed's FIMA Repo Facility.
5. Why does the US care? If Japan sells tens of billions of Treasuries:
Treasury supply in the market increases.
Bond prices tend to fall.
Bond yields rise.
Higher Treasury yields feed into higher mortgage rates, business borrowing costs, and other interest rates in the US.
So the US prefers Japan not to dump large amounts of Treasuries all at once.
An analogy
Imagine Japan owns a large apartment building worth €1 billion.
When it urgently needs cash, it can either:
Sell apartments, which pushes property prices down.
Borrow against the building instead.
The building itself is not protecting Japan's currency. It is simply the asset Japan can use to obtain cash for intervention.
Why would the US buy yen?
If the US Treasury buys yen, it reduces the amount of intervention Japan must finance by selling Treasuries. In theory, that helps stabilize both:
the yen exchange rate, and
the US Treasury market.
That is why a sharp fall in the yen can become a concern for US financial stability, even though it is a Japanese currency.
🦔The US Treasury bought Japanese yen on Friday for the first time since 2011. But it didn't sell dollars to do it. The NY Fed sold euros and bought yen on behalf of the Treasury through Goldman Sachs and Morgan Stanley, according to the Financial Times. A Reuters photographer caught Treasury Secretary Bessent's notepad at a Camp David cabinet meeting. It read "To Do Buy Japanese Yen $5-10 bil." Japan spent $58.97 billion in a single day to defend its currency, the largest intervention in its history. In January, Bessent refused to help.
My Take
Japan holds $1.19 trillion in US Treasury bonds, the largest foreign holder on earth. When the yen falls this far, Japan sells those bonds to raise dollars and defend its currency. Every bond Japan sells adds supply to the US bond market and pushes yields higher. The 30-year yield hit 5.23% this week, highest since 2007. Your mortgage, car loan, and credit card APR all follow Treasury yields. The US sold euros to buy yen because if it sold dollars instead, that would weaken the dollar, which goes against US policy. So the euro took the hit and Europe didn't get a vote.
Bessent refused to touch the yen six months ago. Friday he bought it with euros through Goldman and Morgan Stanley. Japan also has access to the Fed's FIMA Repo Facility, which lets it borrow dollars against its Treasury holdings instead of outright sales. That could keep over a trillion in US bonds off the open market and hold yields where they are. Japan and the US may announce a joint currency policy as early as next week. A currency crisis in Tokyo just became a US fiscal priority because the chain from a weak yen to a higher American mortgage payment runs straight through the Treasury bond market.
Hedgie🤗