Why Did U.S.-Japan Currency Coordination Come Up? "A Calculated Move Disguised as Friendship"

[Financial News]  

"A signal of friendship"
Donald Trump said as much when asked why the United States had joined forces with Japan to defend the yen's exchange rate while aboard Air Force One returning to The White House in Washington, D.C., on the 2nd local time. He said Japan was helped because it is a U.S. ally.
The Wall Street Journal (WSJ), however, reported on the 3rd, citing market experts, that Trump's intervention was the result of a thoroughly calculated judgment. The paper said the coordination was driven by concerns that prolonged yen weakness could trigger serious fallout for the U.S. economy. The episode appears to have reaffirmed that there is little room in the harsh global economic order for a naive division between allies and others.

According to experts, as the yen fell to its weakest level against the U.S. dollar in 40 years, the United States began to worry that Japan might sell U.S. Treasury bonds. Japan, the world's second-largest holder of U.S. Treasury bonds, could sell them to defend the currency and use the proceeds to buy yen.
There were also growing concerns that a weaker yen would push up Japan's import prices and sharply increase the cost of oil imports, especially amid high crude prices caused by the war in Iran.
The yen, which had fallen to 164 per dollar on the 31st of last month, its weakest level in 40 years since 1986, jumped to around 156 per dollar after the U.S.-Japan coordination was announced.
The United States rarely intervenes in the foreign exchange market for the sake of another country.
It stepped in in 1998 to prevent yen weakness from spilling over into a global economic slowdown during the 1997 Asian financial crisis, and it coordinated again in 2011 to curb yen strength.
The dominant view is that this latest intervention was aimed at preventing sales of U.S. Treasury bonds.
With pressure already mounting to sell U.S. Treasury bonds because of the country's huge fiscal deficit and the Federal Reserve's possible rate hikes, there were fears that if Japan started selling, the situation could spiral out of control. Selling U.S. Treasury bonds pushes up yields, which move inversely to prices, and drives up U.S. market interest rates. That would bring about a shock similar to the rate hikes Trump strongly dislikes.
Treasury Secretary Scott Bessent said the administration would use the Federal Reserve's FIMA repo facility to provide dollars so that Japan would not need to sell U.S. Treasury bonds. The FIMA repo is an infrequently used dollar funding tool.

Another reason Trump stepped in to curb yen weakness is Japan's massive investment pledge to the United States. Last year, Japan agreed in a trade deal with Trump to invest $550 billion in the U.S.
If $550 billion flows from Japan to the United States, the yen could collapse, making it more likely that Japan would delay the investment commitment.
In that sense, the currency coordination was effectively Trump laying the groundwork to attract Japanese investment.

Trump has always been negative about a strong dollar.
He has especially argued that a weak yen and a strong dollar erode the price competitiveness of U.S. manufacturing and widen the U.S. trade deficit.
A weak yen boosts the price competitiveness of Japanese products, which are backed by a strong manufacturing sector, in the U.S. market and, as a result, increases the U.S. trade deficit with Japan.
[email protected] Song Kyung-jae Reporter