US-Japan FX Intervention Signals Potential Policy Shift, Citi Says

A coordinated currency intervention by the U.S. and Japan to support the yen may be a "signal of global policy change," though not yet a structural turning point akin to the 1985 Plaza Accord, according to a recent report from Citi Research. The bank has dubbed the emerging framework under U.S. Treasury Secretary Scott Bessent as "Bessentism," aimed at correcting global economic imbalances.

Coordinated Intervention to Support Yen

In late July, the U.S. Treasury Department joined Japanese authorities in a coordinated intervention to bolster the yen as the dollar neared a 40-year high of ¥164. Secretary Bessent confirmed the U.S. used foreign currency assets from the Treasury's Exchange Stabilization Fund (ESF) to purchase yen.

Bessent clarified that the operation was conducted using the ESF's existing assets, reportedly including euros, rather than by extending credit to Japan. Citi views this joint action as a "mini-agreement" designed to prevent a potential financial crisis originating from Japan's currency weakness.

The 'Bessentism' Framework

Citi's report highlights what it calls "Bessentism," a new national economic policy framework under Secretary Bessent focused on rectifying imbalances represented by the U.S. current account deficit. While distinct from other proposed strategies, its core objective is similar.

The policy is reportedly built on five key pillars:

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• Economic security
• Reciprocal free trade
• New rules for a next-generation economic system
• Advantage through financial strength
• Securing more benefits for American workers

Market Implications and Future Outlook

While the intervention does not necessarily signal a weaker U.S. dollar, Citi suggests the U.S.-Japan monetary alliance could expand. The report posits that the central issue will ultimately revolve around China's current account and the value of the yuan.

"If the reversal of the yen's depreciation also leads to a further appreciation of the yuan, it would not be surprising for European countries to adopt a cooperative stance with the U.S.-Japan 'currency alliance'," Citi stated. This could involve joint pressure on China to reverse the yuan's depreciation trend.

However, Citi analysts expressed skepticism that such interventions can fundamentally correct the yen's weakness. They noted the currency's decline is driven by hedging-related selling linked to stock market gains, which could prove to be a "major obstacle" for authorities' efforts.