The Hedge Fund Toolkit Behind the Yen Intervention

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, podcasts, radio, news.

**SPEAKER_2** (0:09)
We're watching the Yen quite closely, obviously. It's not gotten a huge gain.

**David Gura** (0:13)
The Yen continued its recent slide on Monday, and that's in spite of a rare joint effort by the US and Japan late last month to try to strengthen it.

**SPEAKER_2** (0:22)
We are currently at one, what is that, 158 on dollar yen. So the yen has given up half of the gains it made since that intervention.

**David Gura** (0:31)
The US stepped in to prop up the Japanese currency for the first time since 1998, and that caught investors and central bankers by surprise. The intervention was spearheaded by US Treasury Secretary Scott Bessent, who cut his teeth as a macro trader working at hedge funds before he started his current job effectively running the world's largest economy.
For Bessent, propping up the yen is more than the US helping an ally. It's also something that could head off market moves that could result in higher interest rates in the United States.

**Chris Anstey** (1:04)
The last thing he wants is to see, you know, US mortgage rates going even higher.

**David Gura** (1:09)
Chris Anstey is a senior editor on Bloomberg's global economy team, and he points out Japan is the largest foreign holder of US Treasuries. Chris says that if Japan wants to prop up its own currency by buying yen, the dollars it needs to do so could come from selling some of its US debt.

**Chris Anstey** (1:25)
The biggest foreign holder of Treasuries dumping a bunch of their holdings is going to put pressure on 10-year Treasuries, 30-year Treasuries and the 30-year fixed rate mortgage.

**David Gura** (1:37)
Bessent's intervention may not be one and done. The Treasury Secretary recently asked the Federal Reserve to make a policy change that would let Japan borrow more dollars against its Treasury holdings without having to sell them.
Previous Treasury Secretaries were reluctant to intervene in currency markets and investors are wondering how far Bessent is willing to go.

**Daniel Flatley** (1:58)
At the end of the day, you're sort of playing with the good faith and credit of the United States government.

**David Gura** (2:03)
Bloomberg's Dan Flatley covers the Treasury Department.

**Daniel Flatley** (2:06)
The Treasury Secretary is not supposed to act as a hedge fund manager. The Treasury Secretary is supposed to act as the chief financial steward of the United States economy.
So, you know, there are enormous stakes here. And so all's well that goes well until things go off the rails. Things are going fine now seem to be, but that's not to say that is indefinite.

**David Gura** (2:34)
I'm David Gura and this is the Big Take from Bloomberg News. Today on the show, Scott Bessent's interventions in global currency markets. What impact are they having and what's the end game?
All right, let me set the table here with you, Chris, to start. Over the last half decade or so, Japanese yen has weakened against the dollar. Five years ago, a dollar would buy you, say, 110 yen. For the last half year or so, a dollar gets you more than 150 yen. For starters, what is wrong with a weak yen? Why does Japan want a stronger currency?

**Chris Anstey** (3:13)
Well, it wants a stronger currency because it has been flirting with the weakest levels in four decades. And at a time of elevated energy cost, right, they have to use a lot more yen to buy imported oil, fertilizer, all kinds of commodities. And the prices of those have already been rising, right? But it's rising even more in yen terms. So Japanese households and companies have seen their purchasing power really demolished. And Japan's interest rates have been coming up a little bit over the past couple of years, but they are still very, very low, you know, around 1%.
And their inflation is at least double that. So their real interest rates are negative. And that is imparting massive pressure all the time on the end. Obviously, American interest rates much higher, closer to 4%.
And if the Bank of Japan continues to be a laggard in raising interest rates, and you're not going to see intervention really having a lasting effect.

**David Gura** (4:30)
So you have Scott Bessent, the Treasury Secretary, kind of surveilling the global economy, paying close attention to Japan. What do we know of why he decided it was wise for the US to intervene at this point?

**Daniel Flatley** (4:41)
There's a couple of things going on here. There's a geopolitical dimension to this, which is essentially sending a signal to the world that if you're a close US ally, you are not only the beneficiary of potentially good trade agreements, defense agreements, other types of policy benefits, but you also have available to you the might of the dollar and the US financial system to come to your rescue should you run into problems. So I think that there's also the exigencies of the job when it comes to defending the dollar's global role. So one of the things that Bessent appears to have been contemplating was the fact that if Japan needed to defend the yen, it would have to sell US treasuries.