Yen Weakness: Treasury Secretary’s Strategic Measure for U.S. Midterm Elections

The U.S. Dow Jones Industrial Average and S&P 500 indices hit new all-time highs every day since early August. An analysis suggests that this was a meticulously planned scenario by Treasury Secretary Besant since the beginning of the year. In other words, the current upward trend in U.S. stock prices might be the result of deliberate government policy intervention rather than a natural market flow.

Amidst the stock market rally, U.S. Treasury yields continue to rise. With 84 days left until the midterm elections, concerns are growing that if Treasury yields continue to climb, the U.S. stock market will struggle to maintain its current high-flying performance. This is because rising interest rates can increase corporate borrowing costs and dampen investor sentiment, exerting downward pressure on the stock market.

Brad Setser, a senior fellow at the Council on Foreign Relations, concluded that propping up the yen's value is not Treasury Secretary Besant's goal. Setser concluded that Secretary Besant is employing various methods to lower U.S. Treasury yields. This suggests that yen intervention is not the superficial objective, but rather a means to stabilize the U.S. Treasury market.

Historically, the U.S., Europe, and Japan have maintained close coordination, and it has been customary for the U.S. to notify the European Central Bank (ECB) in advance when selling euros. However, this time, Treasury Secretary Besant intervened by selling euros on July 31st and only informed the ECB President on August 1st. This unilateral action by the U.S. did not give the ECB time to prepare for a decline in the euro's value, leading to strong protests and backlash from Europe.

The U.S. government has postponed decisions that could negatively impact the market, such as increasing medium- to long-term debt and issues with the debt ceiling, until early 2027. This is interpreted as an intention to defer all adverse policy decisions until after the midterm elections scheduled for November 2026. Analysis suggests that Treasury Secretary Besant made these decisions with a desperate desire to boost stock prices somehow until the elections.

Despite being a reserve currency country capable of issuing and mobilizing dollars as much as needed, the U.S. used euros for this yen intervention. The reason is that if Treasury Secretary Besant were to sell dollars to buy yen, it could signal to the world that the U.S. has 'given up on a strong dollar.' Such a signal could trigger foreign investors to sell U.S. Treasury bonds, leading to a rise in Treasury yields.

Selling dollars would send a signal of dollar weakness, which could lead to various problems. The biggest concern is that foreign investors would dump U.S. Treasury bonds, leading to a decline in bond prices and a rise in interest rates. Therefore, selling dollars is difficult not only due to exchange rate losses but also due to the ripple effects that a dollar weakness signal would bring.

Treasury Secretary Besant convinced President Trump that if the dollar weakens, foreign investors would sell all their U.S. Treasury bonds and leave, so maintaining a strong dollar until the midterm elections is necessary to prevent a stock market crash. Thanks to this persuasion, President Trump has not advocated for a weak dollar recently. This demonstrates that maintaining a strong dollar is a key policy direction for the current administration ahead of the midterm elections.

The U.S. government's annual interest expense currently amounts to 1 trillion dollars. This is a massive sum, equivalent to one-fifth of the U.S.'s annual tax revenue of 5 trillion dollars. In other words, the U.S. is spending a significant portion of its revenue on interest payments, placing a severe burden on its fiscal health.

Although Treasury Secretary Besant's rhetoric on currency intervention was strong, the actual amount mobilized was not significant. The market observed whether the U.S. would truly intervene forcefully, and when it concluded that there was no 'ammunition' for intervention, the yen/dollar exchange rate gradually began to rise again. This shows that a limited intervention scale has difficulty making a meaningful impact on the vast foreign exchange market.

In the past, with smaller market sizes and relatively larger government scales, currency adjustments were possible through intergovernmental agreements alone. However, current foreign exchange trading volume has surged to 9.6 trillion dollars (approximately 13 quadrillion Korean won) per day. In contrast, Secretary Besant's intervention scale is less than 0.1% of this volume, indicating a significant weakening of the government's ability to adjust exchange rates.

The U.S.'s national debt-to-GDP ratio stands at a staggering 123%, while Japan's is even more severe at 237%. Such massive national debt makes it impossible for governments to freely raise or lower interest rates. This is because interest rate hikes can further increase the burden of interest payments, exacerbating fiscal crises.

The U.S. and Japan are in a situation where they cannot cooperate on policy due to excessive debt. As a result, U.S. 30-year Treasury yields are approaching 5.43% and continue to rise. The severe debt problems in both countries hinder international cooperation and even restrict their independent policy operations.

The current stock market boost is a result of Treasury Secretary Besant's meticulous election strategy. While various methods like TJ Django were utilized to boost the stock market, a side effect has been the continuous rise in U.S. 10-year and 30-year Treasury yields. This shows that short-term policies aimed at elections can lead to long-term market instability.

Treasury Secretary Besant was concerned that if Japan sold U.S. Treasury bonds to prop up the yen's value, U.S. Treasury yields would rise. Therefore, Besant advised Japan to intervene in the foreign exchange market by borrowing money against Treasury bonds through the Federal Reserve's FIMA (Foreign and International Monetary Authorities) repo facility. Japan responded with a reaction indicating it 'might do so.' The FIMA facility is a system that allows foreign central banks to secure dollar liquidity using U.S. Treasury bonds as collateral, enabling Japan to obtain funds for yen intervention without selling its Treasury bonds.

However, a check to see if Japan actually borrowed money from the U.S. Fed through the FIMA facility revealed that the balance as of August 5th was 0. This means that Japan is not intervening in the foreign exchange market by borrowing money from the Fed. It has been confirmed that despite Secretary Besant's suggestion, Japan is not taking actual action.

87 billion dollars were mobilized to slightly lower the yen/dollar exchange rate from 157 yen to 159 yen, but the FIMA facility limit is only 60 billion dollars. This is insufficient for even a single intervention. Therefore, analysis suggests that Treasury Secretary Besant's currency intervention is more accurately viewed as political 'lip service' to the market in a situation where actual intervention capacity is lacking.

Even if the FIMA limit were to increase to 300 billion dollars, Japan would have to incur significant interest losses if it borrowed money from the Fed to intervene in the foreign exchange market. It would be difficult for the Japanese government to explain such interest losses to its parliament and its citizens. If Japan does not actually use this facility, U.S. Secretary Besant could end up looking foolish.

Treasury Secretary Besant made every effort to lower U.S. Treasury yields until the midterm elections, but the outbreak of the Iran War this spring disrupted the plan. Although successful in pushing stock prices to an all-time high by early August, unexpected variables like the war negatively impacted the plan.

Key indicators to watch going forward are the U.S. 10-year Treasury yield, which has again surpassed 4.7%, and the 30-year Treasury yield, which continues to rise above 5.3%. Also crucial are whether the U.S. FIMA limit will be raised from 60 billion dollars and whether Japan will actually use FIMA. From Japan's perspective, it will be in deep contemplation for 84 days as to whether it needs to lower U.S. Treasury yields, incurring interest losses. In addition, not only U.S. interest rates but also Japanese interest rates must be continuously monitored. Finally, when the U.S. Treasury will begin issuing additional long-term Treasury bonds will be a significant issue that will greatly impact the market. These factors could lead to an overall increase in market volatility, so investors are advised to exercise caution.