Bessent’s Quixotic Attempt to Strengthen the Yen | American Enterprise Institute

George Santanyana, the Spanish philosopher, famously said that those who cannot remember the past are condemned to repeat it.

When it comes to foreign currency intervention, it is surprising that of all people, Treasury Secretary Scott Bessent, a former hedge fund operator, seems to have forgotten the many earlier attempts at foreign exchange intervention that failed for want of being supported by fundamental economic policy change. This has induced Mr. Bessent to embark on a quixotic attempt to prop up the swooning Japanese yen with foreign exchange intervention without requiring that the Bank of Japan hikes interest rates or that the Japanese government addresses Japan’s public finance sustainability problem.

If there is one episode of failed foreign exchange intervention with which Mr. Bessent should be more than familiar, it is that in support of the pound sterling in 1992. In that year, the Bank of England failed to prevent a humiliating sterling devaluation despite massive foreign exchange intervention and then large interest rate hikes. After all, Mr. Bessent was a principal advisor to George Soros in his successful attempt to break the Bank of England on what came to be known as Black Wednesday.

One lesson from Black Wednesday is that massive foreign exchange may not be sufficient to prevent a currency from depreciating. It is estimated that on Black Wednesday, the Bank of England went through around 27 billion pounds in foreign exchange intervention in a single day to no avail. Another lesson was that large interest rate hikes are also not helpful to stabilize a currency if the markets know that such interest rate hikes are not sustainable. In the 1992 episode, the markets knew that a weak UK economy would not allow the Bank of England’s interest rate hike from 10 percent to 15 percent to be sustained for very long.

Fast forward to Japan in 2026. Over the past year, the Japanese yen has depreciated by almost 10 percent to a low of 164 yen to the dollar. That was the weakest level in the past 40 years. By most conventional estimates, the yen is undervalued by at least 15 percent.

One factor explaining the yen’s weakness is the wide short-term interest rate differential between Japan and the United States. Whereas the Fed’s fund’s rate is currently 3.5 percent, that of the Bank of Japan is 1 percent. Another factor is Japan’s unsustainable public finances. At a time when Japan has a public debt to GDP ratio of 230 percent and a primary budget deficit, its new prime minister Sanae Takaichi talks of fiscal stimulus. In turn, that has caused long-term Japanese bond yields to spike to multi-decade highs.

Undaunted by the many past unsupported foreign exchange intervention to provide more than temporary currency market relief, over the past couple of weeks, Mr. Bessett along with his Japanese counterparts has engaged in coordinated foreign exchange intervention of more than $100 billion to prop up the yen. Unsurprisingly, that intervention, being unsupported by economic policy adjustment measures, has got very little bang for the buck. While initially the yen did strengthen modestly from 164 to 155 to the dollar, it has since given back around half of that gain.

It is doubtful that simply having the Bank of Japan hike interest rates would strengthen the yen on an enduring basis for a similar reason to why the Bank of England’s interest rate hike did little for sterling in 1992. With an unusually high public debt burden, markets would soon realize that such interest rates were not sustainable in that they could lead to a public debt spiral.

Rather, any serious attempt at Japanese exchange and bond market stabilization would need a serious effort at budget consolidation to put the country’s debt on a declining path. If accompanied by foreign exchange intervention, such an approach might produce not only a strengthening in the currency but also a decline in long-term interest rates. It might do so in the way that many of the IMF’s stabilization programs have done for their member countries.

Churchill said that you can always count on the Americans to do the right thing after they have exhausted all the other possibilities. We must hope that the same is true of Mr. Bessent. Now that unsupported US-Japanese foreign exchange intervention has failed, maybe he will consider getting the Japanese to try foreign exchange intervention supported by serious budget reform.