Brad Setser on the US's Unusual Japanese Yen Intervention

The episode centers on the unusual U.S.–Japan intervention to support the yen and why Washington got involved. Hosts Tracy Alloway and Joe open by flagging an eye‑catching image of Treasury Secretary Scott Bessent's handwritten to‑do note—“buy Japanese yen 5–10 billion”—and then bring on Brad Setser, senior fellow at the Council on Foreign Relations, to explain the mechanics and rationale. Setser says the U.S. role was atypical: Washington sold euros as part of the action and used the Fed's FIMA repo facility to provide dollars to Japan, a move intended to give Tokyo more options than outright Treasury sales. He emphasized the intervention was primarily driven by Japan’s Ministry of Finance in dollar/yen markets, with the U.S. adding support to help limit potential spillovers into the U.S. Treasury market.

Setser laid out why the yen weakened and what would make intervention stick. He described deep structural factors—Japan’s short‑term policy rate near 1% while the Fed is around 3.25–3.5%, large foreign‑asset holdings (roughly $1.2 trillion in reserves and $900+ billion in GPIF foreign assets), and a current‑account surplus near 5% of GDP—that create unusual flow dynamics. He argued the BOJ’s long reluctance to raise rates (because it wants to cement a return to sustained inflation) explains much of the weakness, and that intervention will be effective only if the BOJ follows with rate hikes (he flagged September as a test). Setser also explained the FIMA repo facility’s role: it lets central banks get dollar funding against Treasuries without immediate market sales, albeit at a premium and subject to administrative caps. The hosts and Setser debated risks—Adam Posen’s skepticism that FX intervention can be defended long term was noted—and Setser stressed the MOF’s historic “weak‑side” thresholds (market watchers point to ~¥160) and Japan’s distinctive fiscal picture (a near‑balanced primary budget and large foreign assets) as reasons to think a floor can be re‑established if policy and flow dynamics change together. The episode closes with the hosts noting the intervention’s novelty and the open question of whether it will permanently alter expectations absent coordinated BOJ action.