When the Exchange Rate Becomes a Geopolitical Tool: US and Japan Join Forces to "Weaponize" the Yen, Forcing the Market to Rewrite Pricing Formulas

According to Zhitong Finance APP, the unprecedented joint intervention by the US and Japan to support the yen could profoundly impact future market behavior patterns.

Japan has intervened in the foreign exchange market before, but the scale of this action far exceeds previous instances. More importantly, this operation received public endorsement from the United States; it is reported that the intervention was not carried out directly through USD/JPY, but through EUR/JPY cross trades, accompanied by a clear signal of political support.

Some investors believe this move is highly significant.

"The Japanese Ministry of Finance and the US Treasury have successfully weaponized the yen," said Jesper Koll, Expert Director at Monex Group, noting that this essentially serves as a deterrent to the market. He believes that this intervention goes beyond traditional foreign exchange management, as the two countries are using their public balance sheets jointly to guide market psychology. He added: "When two major sovereign nations concentrate increasingly scarce national resources on the same target, the market has no choice but to take this signal seriously."

This joint intervention marks the first time since 1998 that the US and Japan have jointly purchased yen, and the first coordinated action since the G7's intervention to weaken the yen following the Great East Japan Earthquake in 2011.

Political Tool

Koll also pointed out that the political signaling aspect of this operation is equally unprecedented. By combining political support with financial firepower, the US and Japan intend to raise the cost of shorting the yen—putting two sovereign nations' balance sheets on the opposite side of the trade simultaneously.

Cornell University Professor Eswar Prasad believes this was more of a defensive move, but he also acknowledges it demonstrates that exchange rate policy is increasingly entangled with geopolitics. "Currency market intervention has clearly taken on a geopolitical aspect," said Prasad, noting that the Trump administration appeared more inclined to support central banks of countries perceived as aligned with US priorities.

Some analysts compared this event with US support for the peso under Argentina’s President Javier Milei. At that time, Argentina was in the midst of crucial midterm elections and facing increased currency turmoil. In September and October 2025, the Trump administration stepped in with a package of support, using the Treasury’s Exchange Stabilization Fund (ESF) for a $20 billion currency swap with Argentina’s central bank and buying pesos in the open market.

"Besant was the key figure throughout. The same Treasury Department, the same ESF, the same playbook—using foreign exchange operations as a tool of diplomatic policy," said Michael Gayed, Chief Investment Strategist at Tactical Rotation Management. "Support for Argentina was about backing an ally."

Similarly, Quantum Strategy strategist David Roche also stated that US motivations may go beyond financial stability or the Treasury market, with political considerations possibly being an important factor. "Perhaps he just wanted to show goodwill to his ally, Sanae Takaichi."

The US Treasury Department did not respond to requests for comment.

Strategists believe this intervention will change the way investors think about the yen.

"This especially changes the funding cost logic in carry trades," said Billy Leung, Investment Strategist at Global X ETFs. "If investors now see intervention risk as a real and coordinated threat, they’re likely to be more cautious about large-scale shorts on the yen and instead look for alternative funding currencies."

For a long time, the yen has been the global go-to funding currency for carry trades—investors borrow low-interest yen to invest in higher-yielding overseas assets.

Leung added that the broader consequence is that "exchange rate policy itself" has re-emerged as a source of market risk after lying dormant for a decade. If investors gradually shift to the euro or other funding currencies, it could reshape major foreign exchange market positioning.

Masahiko Loo, Senior Fixed Income Strategist at State Street Global Advisors, also believes this event means traders must increasingly factor geopolitical variables into their pricing. "The biggest change is that now traders have a new variable to price in—a policy response function, not just macro fundamentals."