Posted:August 10, 2026
Categories: Bond Market, Carry Trade, Central Bank, Federal Reserve, Geopolitics, Government Bond Yields, Japan, Monetary Policy, US Treasuries, Yen
Financial markets are typically quiet in late July, as many people leave the office to unwind and enjoy time away on vacation. As it happens, our family embarked on a road trip to North Carolina during the last week of July. Many family memories were made hiking, relaxing, and whitewater rafting. During our whitewater rafting trip on the French Broad River (pictured below), thinking I was 20 years old again, I paddled a bit too hard and was promptly deposited into the river, dodging rocks and the raft as it ran me over. Thankfully, I was able to snag an oar from our guide at the back of the raft and quickly get back into the boat. My ego was a bit bruised, and my wife a bit scared, but all was well in the end.
Figure 1: Rafting on the French Broad River
Source: Author
While I was getting fished out of the river, global markets were navigating a violent set of rapids of their own.
At his second meeting as Federal Reserve Chair, Kevin Warsh signaled a structural change at the central bank: less forward guidance and a greater willingness to let the bond market do the work of tightening financial conditions. Forty-eight hours later, Treasury Secretary Scott Bessent joined Japanese monetary authorities in a coordinated foreign exchange intervention to rescue a collapsing yen. These are different actions, but part of one coordinated strategy.
Warsh is slowly withdrawing the Fed’s hand from the market’s expectations. Less guidance means the central bank is allowing the market to determine the price of capital. This creates space for the Treasury to take the lead in managing markets and capital flows.
Just as my guide extended an oar, Washington’s macro duo tossed a financial lifeline to stabilize markets. These are calculated decisions by two experienced market participants to defend U.S. financial markets and U.S. economic power.
The yen intervention was never really about the yen. It was about protecting the U.S. Treasury bond market and suppressing volatility.
How the Yen Got Here
Currencies trade in pairs against one another, with the USD/JPY pair commonly quoted. A higher number indicates a weaker yen. By late July, the yen sank to a four-decade low of ¥164 (see figure 2). Over four years, the dollar gained close to 50% against the yen, which is another way of saying the yen lost about a third of its purchasing power against the dollar.
This currency weakness has been building for years due to the ultra-loose Bank of Japan policy: yield-curve control caps, years of negative nominal rates, and persistently negative real rates today. A weak currency helps Japanese exporters, but punishes a country that must import oil. When the U.S./Iran Gulf War pushed crude higher, the collapse accelerated, and Japanese inflation rose with it.
Figure 2: USD/JPY, 2003-2026
Source: TradingView. Note: chart reflects the post-intervention level near ¥157.8; the July peak reached approximately ¥164.
The Yen Carry Trade
For roughly 15 years, speculators have piled into unhedged short-yen positions to harvest interest-rate spreads. This is the yen carry trade, which I explained in detail back in August 2024.¹
Essentially, speculators and international financial institutions exploit this trade by borrowing yen at Japan’s ultra-low interest rates and investing the proceeds in higher-yielding foreign-domiciled assets, such as U.S. Treasuries or U.S. stocks.
Most of these strategies use significant leverage to amplify the return, which is what makes the reversal violent. Carry trades are self-reinforcing on the way up: the more the trade works, the more capital crowds in. They are equally self-reinforcing on the way down.
Why Japan Couldn’t Do It Alone
Japan has repeatedly intervened in foreign exchange markets to attempt to strengthen its currency. It sells dollars and buys yen, thereby strengthening the yen and easing imported inflation. However, recent unilateral interventions by the Japanese Ministry of Finance (MoF) have proved fleeting, as the currency strengthens briefly, only for speculators to return and push the yen back down.
Enter Scott Bessent.
On Friday, July 31, the United States joined Japan in a coordinated yen-buying operation. During a Cabinet meeting at Camp David, Reuters senior photojournalist Daniel Heuer photographed a highly visible, handwritten “To Do” notepad in front of U.S. Treasury Secretary Scott Bessent (see figure 3). This was the first joint action to strengthen the Japanese currency since 1998. The timing was ideal, as speculative short positions on the yen had reached their most crowded levels in 19 years.2
Figure 3: Bessent’s To Do List
Source: @NickTimiraos
The Mechanics of the Trade
Earlier in the week, Tokyo is estimated to have sold on the order of $50-59 billion in a single day, likely its largest single-day intervention on record. Bessent’s notepad put the U.S. side at $5-10 billion. Japan performed most of the intervention, while the U.S. brought the signal and the confidence jawboning.
The sudden onslaught of coordinated actions triggered a violent short squeeze. Leverage-constrained speculators were forced to buy back yen to cover their liabilities, mechanically driving the USD/JPY exchange rate down from ¥164 to ¥157 in a single session.
The U.S. Treasury operates through its fiscal agent, the New York Fed’s trading desk. To avoid selling dollars outright, which would require liquidating assets and putting upward pressure on domestic yields, the desk sold euros from the Exchange Stabilization Fund to buy yen. This enabled Washington to defend the yen without touching the Treasury market.
There is a second piece. Rather than lean on traditional dollar swap lines, Bessent and the Fed pushed Japan toward the Fed’s Standing FIMA Repo Facility, which allows foreign monetary authorities to pledge U.S. Treasuries as collateral for overnight dollars rather than sell them outright. Bessent has since argued that the facility should be enlarged.
Japan’s $1.2 Trillion Position
As it turns out, this is the most important piece of the story. Japan is the single largest foreign creditor to the United States, holding $1.2 trillion in U.S. Treasuries. However, with U.S. national debt growing exponentially and the government running persistent fiscal deficits, finding buyers for U.S. Treasuries has become a critical national security challenge.
When a large owner of U.S. Treasuries starts selling bonds, this pushes interest rates up. Sizing this potential risk, an analysis by the Federal Reserve Bank of Kansas City estimates that a $140 billion Treasury liquidation by foreign holders would structurally drive U.S. yields up by 0.45% to 0.65%.3 That is higher financing costs for the federal government, higher mortgage rates, and higher borrowing costs for consumers already being squeezed.
Three Analysts, Three Answers
Reading through the commentary, three of the sharpest macro observers reach three different conclusions about what Washington is actually defending.
Michael Howell: Is the carry trade the real risk?
No. Yen-denominated offshore claims have collapsed from ~20% of global borrowings in the 1990s to roughly 4% today, a “pale threat.”⁴ This is about global liquidity and bond volatility, not a carry unwind.
Robin Brooks: Can Japan fix this itself?
Yes. Sell a slice of its foreign assets, pay down gross debt, stabilize the currency without a yield spike.⁵ Intervention substitutes for a reform Tokyo refuses to make.
Louis-Vincent Gave: What if Japan does normalize?
Repatriation. Japan’s $3.5 trillion net international investment position starts coming home.⁶ Washington needs the yen fixed without Japan having to fix it.
Notice what happens when you read Brooks and Gave against each other.
They describe the same action and reach opposite verdicts. Brooks says Japanese institutions selling foreign assets is the solution, arguing this is a clean way to retire gross debt and stabilize the currency. Gave says it would be a catastrophe if the Bank of Japan lets rates rise and the yen strengthen; Prime Minister Takaichi will face enormous pressure to have domestic institutions repatriate capital into Japanese government bonds, which would mean selling U.S. bonds and U.S. stocks at scale.
Brooks notes that his path remains completely unused, blocked by resistance within the Japanese bureaucracy and by pushback from the U.S. Treasury against the sale of U.S. bonds. Gave’s framework explains exactly why that pushback exists.
Where I Land
I side with Howell on what is being defended. This looks less like a desperate stand against a carry-trade fire sale and more like structural coordination: manage the dollar lower, work off the federal debt, and keep the offshore dollar funding system from seizing. Treasury’s real concern is volatility in the bond market.
The skeptics have the stronger long-run case. If the BoJ returns to capping yields by printing money to buy bonds, it simply transfers the bond market crisis into a currency crisis. Japan can’t save the bond market and the currency at the same time. Historically, most sovereign nations in debt crises have sacrificed their currencies for their bond markets. What makes this episode different is that the sovereign doing the defending isn’t Japan.
The Bessent-Warsh Doctrine
The yen intervention represents an emerging trend, and I have argued in past articles that the United States continues to deploy what analyst Michael Every calls Economic Statecraft.7 These actions represent a fundamental switch in economic policy that prioritizes national industrial strength, self-sufficiency, and actions to reduce market volatility over the dogmas of free trade and globalization. Bessent and Warsh sit at the center of this strategy, where core pillars include:
The Fed’s role is quieter but not smaller. The FIMA facility is the central bank’s balance sheet lent to the Treasury’s foreign policy, and it is the piece Bessent wants expanded.
Both men are former hedge fund traders. Both worked under Stanley Druckenmiller, arguably the greatest macro trader of all time, who has publicly praised Warsh’s grasp of markets and international money flows.8 They read the global monetary system as a network of interconnected capital flows rather than through neoclassical models.
U.S. Dollar: Strong or Weak?
Which raises the obvious question: does this administration want a weak dollar or a strong one?
One camp says weak. They argue that Bessent is actively steering the country toward a deliberately weaker U.S. dollar. A weaker currency is necessary for the United States to rapidly expand its industrial and manufacturing base, thereby imitating China’s “workshop” state capitalism. These policies may mean the end of the strong dollar policy.
The counterargument is Brent Johnson’s Dollar Milkshake thesis: a strong dollar is the ultimate instrument of empire, structural offshore dollar demand will keep pulling capital in regardless of policy preference, and Washington will never voluntarily surrender currency hegemony.
I think both are partly right. Bessent and Warsh are managing a range rather than targeting a level, working to limit volatility while keeping the dollar bounded on both sides. Not so high that it damages leveraged players who are short the dollar, and not so low that it cedes hegemony.
Closing
Despite the raft running over me in the river, I got back in the boat. But I needed help. I needed an oar, and thankfully, someone was in a position to hand me one. Markets got the same treatment on July 31.
This does not read to me as the end of dollar hegemony or of U.S. financial dominance. What July 31 demonstrated is that the Treasury defended an allied currency without selling a dollar of its own, and leaned on a Fed facility to keep its largest creditor from becoming a seller. The dollar remains the world’s reserve currency, and the United States remains the primary destination for global capital. Bessent and company have many more tools in the box.
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