Why the US and Japan Moved to Support the Yen – and What It Means for Global Markets

An unexpected alignment between the world's two largest economies has triggered a sharp shift in the euro's exchange rate and drawn renewed attention to vulnerabilities within the U.S. debt system.

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Japanese economy

US and Japan Support the Yen to Ease Pressure on Debt Markets

For the first time in 15 years, the United States and Japan reportedly carried out large-scale purchases of the Japanese yen on the foreign exchange market, using the euro in the transactions to help support the Japanese currency.

According to banking analysts, the U.S. Treasury chose to use euros for the operation in order to avoid weakening the dollar. As a result, the euro fell against most major G10 currencies and lost approximately four percent against the yen within just a few days.

For decades, global investment funds relied on the carry trade strategy. Investors borrowed yen at extremely low interest rates in Japan, converted the funds into U.S. dollars, purchased U.S. Treasury securities, and profited from the difference in yields. During periods of negative interest rates, the Bank of Japan effectively subsidized borrowing costs, making the strategy even more attractive. As demand for the trade increased, the yen weakened because Japan continued supplying large volumes of its currency to the market.

In recent years, higher global oil and natural gas prices added further pressure to the yen. Japanese importers sold increasing amounts of yen to purchase energy in U.S. dollars, turning Japan's traditionally positive trade balance into a deficit and removing an important source of natural support for the currency.

To prevent a disorderly decline in the yen, the Bank of Japan began selling U.S. Treasury securities and using the proceeds to buy yen while also raising its benchmark interest rate above zero. Private investors followed with their own sales of U.S. government bonds in order to repay yen-denominated loans as quickly as possible.

Japan remains the largest foreign holder of U.S. government debt, with approximately $1.14 trillion in Treasury securities. Large-scale bond sales pushed Treasury yields higher, increasing borrowing costs for Washington and making it significantly more expensive to service the United States' roughly $40 trillion national debt. According to this assessment, the joint intervention to support the yen was intended to reduce those pressures.

Long-Term Risks to the US Debt System

U.S. Treasury securities have long served as one of the foundations of the global financial system. By borrowing extensively through the bond market, the United States finances defense spending, social programs, and other government obligations while reinforcing the dollar's position as the world's primary reserve currency.

At the same time, the United States has become increasingly dependent on continuous demand for its debt. New Treasury securities must regularly replace maturing obligations, while policymakers also seek to prevent large foreign holders, including Japan and China, from selling substantial portions of their portfolios. Interest payments on the national debt have already risen above one trillion dollars annually, exceeding the U.S. defense budget.

According to projections by the Congressional Budget Office (CBO), the fiscal outlook is expected to deteriorate further by 2031. At that point, economic growth could lag behind the pace at which interest obligations accumulate, causing federal debt to expand faster than the economy's ability to support it. Such a trajectory could ultimately force policymakers to choose between defaulting on obligations or expanding the money supply aggressively to finance government debt.

As long as global energy markets, commodity trade, and international commerce remain heavily tied to the U.S. dollar, demand for American government bonds is expected to remain strong. However, the emergence of alternative financial systems, including the expansion of BRICS initiatives or central bank digital currencies, or a coordinated reduction in Treasury holdings by major investors such as China, Saudi Arabia, or Japan, could significantly weaken demand for U.S. debt. In that scenario, the supply of Treasury securities could outpace investor demand, placing severe pressure on the American financial system.

A U.S. debt crisis would likely develop gradually rather than suddenly. It would represent a prolonged erosion of America's financial flexibility and strategic capabilities rather than a single market event.