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Listen to the latest economic insights from CFC experts John Suter, Sam Kem, and Antony Davies.
Welcome to the Economic and Market Watch podcast for the week of August 17, 2026. This is Antony Davies.
Antony Davies:Both Japan and the U.S. recently intervened to support the yen. What does that mean and why should we care?
Antony Davies:It's helpful to think of a foreign currency as an object, like for example, gasoline. There's a certain supply of gas available and it sells at a certain price. If the supply declines, competition among buyers drives the price up. If the supply rises, competition among sellers drives the price down.
Antony Davies:So too with currencies. We give the price of currencies a special name, the exchange rate, but the same economics applies, though with one frustrating twist.
Antony Davies:Exchange rates can be defined as dollars per yen or as yen per dollar. Neither is more correct. The problem is that a movement in the exchange rate can mean different things depending on which definition we use.
Antony Davies:To keep things clear, let's talk about exchange rates the same way we talk about other prices. Dollar per gallon, dollar per car, dollar per house, dollar per foreign currency.
Antony Davies:A higher price means that your dollars have less purchasing power. A lower price means that your dollars have more purchasing power.
Antony Davies:So too with foreign exchange. The higher the price of yen, the weaker is the dollar and the stronger is the yen. The lower the price of yen, the stronger is the dollar, the weaker is the yen.
Antony Davies:Just as the price of gas reflects both the need for gas and the amount available, the price of a currency reflects people's need for the currency and the amount available. Americans who purchase Japanese securities and products need yen to pay for them. As Japanese securities and products become more desirable, Americans' demand for yen rises and the yen strengthens.
Antony Davies:But the opposite is also true.
Antony Davies:As Americans become less interested in purchasing Japanese goods and securities, their demand for yen declines and the yen weakens.
Antony Davies:And the yen has been weakening since at least 2021.
Antony Davies:Starting in 2022, Treasury yields rose increasing the gap between what investors earned on US debt versus Japanese debt. Investors became less interested in Japanese debt, which means they had less need for yen and that caused the yen's value to weaken.
Antony Davies:Then came the 2025 tariffs.
Antony Davies:The tariffs made Japanese goods more expensive for Americans, so Americans bought fewer Japanese goods and so had less need for yen. That further weakened the yen's value.
Antony Davies:But the weaker the yen is, the more expensive it is for the Japanese to purchase dollars, and that makes it more expensive for the Japanese to purchase American goods and securities. Because many other countries accept U.S. dollars as payment, it also makes it more expensive for the Japanese to purchase many non US products -- among these, oil.
Antony Davies:To strengthen the yen, Japan's government intervened in currency markets by purchasing yen. This reduced the supply of yen available to markets, driving the price of yen up.
Antony Davies:And herein lies a problem.
Antony Davies:The Japanese government buys yen by offering US dollars to people holding yen. And where does the Japanese government get those US dollars?
Antony Davies:It sells some of its stock of U.S. Treasurys.
Antony Davies:But selling U.S. Treasurys increases the supply of Treasurys on financial markets. That drives the price of Treasurys down and their interest yields up.
Antony Davies:Here's the chain of events once more: A weaker yen makes it more expensive for Japan to purchase foreign goods and securities. To strengthen the yen, the Japanese government purchases yen. To obtain the U.S. dollars it needs to pay for the yen, the Japanese government sells U.S. Treasurys. But selling Treasuries puts upward pressure on U.S. interest rates.
Antony Davies:And the one thing Americans don't need right now are higher interest rates.
Antony Davies:Higher interest rates increase monthly mortgage payments, making it harder for Americans to make ends meet. They increase the cost of capital equipment, slowing investment and economic growth. And they increase the federal deficit, making higher taxes more likely.
Antony Davies:So the U.S. Treasury -- for the first time in almost thirty years -- also intervened by purchasing yen. It paid for the yen by selling some of its stock of euros. Treasurys yen purchase reduced Japan's need to purchase yen and, in turn, its need to sell U.S. Treasurys. And that reduced the upward pressure on Treasury rates.
Antony Davies:But why did the U.S. Treasury pay for the yen with Euros instead of dollars?
Antony Davies:In part because if the Treasury had paid with dollars, that would have increased the supply of dollars in markets, and that would have put downward pressure on the dollar's purchasing power.
Antony Davies:We know that by another name: Inflation.
Antony Davies:This is Antony Davies for the Economic and Market Watch podcast. Thank you for listening.
Antony Davies:For more detail on exchange rates, download this week's Economic and Market Watch intelligence brief and dashboard.
Antony Davies:Economic and Market Watch is available on podcast apps including Spotify, Apple Podcasts, and other platforms. If you don't already, please rate us, follow us, and leave a review. And if you'd like to exchange email, contact us at economicresearch@nrucfc.coop