Why is America bailing out the yen?

**Akshara** (0:04)
In today's episode, we'll break down two important stories. First, we'll talk about why America is bailing out the yen, and then we'll read between the lines of Indian mid-cap IT.
Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Thursday, 6th August. Coming to the first story.
So, on Thursday, July 30th, Japan entered the currency market to support the yen. And this wasn't a routine move. Historically, Japan's interventions have run in the opposite direction, trying to keep the yen from becoming too strong.
But that said, it was hardly astonishing. The yen has been shrinking steadily to new lows, and with that, Japan has switched to propping it up. What happened on the next day, July 31st, was far more unusual. The United States joined Japan's defense. Its treasury began selling euros into the market, buying yen instead. And this was extraordinary. The United States had last joined hands with Japan for a currency intervention 15 years ago in 2011 The last time it actively bought yen was before the start of the millennium, back in 1998
Now, to be fair, this fits its recent world view. The treasury has explicitly argued that when foreign currencies are weak, their products become too cheap for America to compete with. But it is one thing to claim you believe something, and another entirely to step into the market and make it happen. So after two days of intervention, the yen strengthened from nearly 164 yen, a four-decade low against the dollar, to around 155 yen by Monday. It was a swing of nearly 5% in just two days. Price movements, though, weren't the most interesting outcome of this move. More interestingly, it sent a signal. If you were betting against the yen, your bets could suddenly go wrong, leaving you scrambling to close your position. But why was this necessary?
And more importantly, why did America jump into the fray? Now, the world has offered a simple carry trade for a long time. The interest you pay to borrow yen is always much lower than what you get from American government bonds. And at the moment, a new Japanese two-year bond yields approximately 1.5%, while two-year US treasuries pay out approximately 4.25%.
While the two stay in place, you can borrow yen, buy US bonds, and make easy money for no cost. But this comes with one risk. If the yen rises more than roughly 2.75%, the trade disappears, and you have to pay out of your own pocket. But the long-term trajectory of the yen has looked downwards for some time. And in fact, there has been constant pressure to sell the currency.
Like us, for instance, Japan imports most of its energy, and as global prices rise, Japanese buyers need more foreign currency to pay for those imports, pushing them to sell yen. Now, a range of fiscal worries, which we covered previously, added to the pressure. Meanwhile, the carry trade made it profitable to sell yen and buy dollars in their place. And so, the yen kept falling, even as the rate gap narrowed. Meanwhile, as investment opportunities within Japan have been dry, institutions and households were also sending money abroad in search of better returns. Now, much of that landed in the United States. And as the US Treasury noted, the United States received 84% of Japan's outbound portfolio investment in 2025
So, if you were the betting sort, the yen falling further was an easy bet to take. By late July, non-commercial traders were net short on the yen by more than 163,000 futures contracts. This was the most visible signal of a wider market sentiment that expected more yen weakness. And this consensus was making things even harder for Japan, sending up the prices of everything from energy to raw materials to consumer goods. The average Japanese household was finding that their paychecks could fetch less, while its economy was fragile. But when there's such a consensus in the market, and a trade gets this crowded, it creates room for a rout. Even a small reversal might push many traders to unwind their trades, which creates a stronger reversal, which pushes even more traders to unwind, and so on. An avalanche can follow. And so, on July 30th, when Japan reportedly began buying up yen outside its own normal trading hours, it pushed the dollar-yen exchange rate from around 164 to 158 yen in one session. But it didn't interfere with how cheap the yen was to borrow.
The next day, the Bank of Japan held its policy rate at 1%, and over the long term, yen funding would look the same. It changed market conditions over the short term, but its fundamental direction stayed the same. But if anyone thought the yen would resume its downward trajectory, they were mistaken. Because within hours, the United States jumped in. The US Treasury reportedly instructed the New York Fed to sell yen, and soon Morgan Stanley and Goldman Sachs were facilitating its trade, pumping euros into the market for yen. Now US Treasury Secretary Scott Besant described the sale as a reallocation of America's reserve resources. And to him, the euro was close to its fair value. The yen, in contrast, was well below. So he then said the United States would do whatever it takes to arrest the yen's decline, and Japan publicly confirmed the coordination. So these orders had two effects. For one, the two countries just bought up the yen being offered over those sessions, sending its price up, but the bigger effect was psychological. So this intervention added sudden uncertainty to the market. And if they intervened once, chances were they could do so again. Traders weren't simply thinking of how much the two countries had already spent, but how much more might follow and when.