Investing / The Compound Effect
Why the US bought yen and what it means for your portfolio
| 5 min | By Heath J. Harris
Washington quietly bought yen to steady Japan's currency. Here is why that matters for the record run in US stocks and what could break the calm.
Summary
- The US Treasury bought yen alongside Japan in the first joint operation since 1998, using euros rather than dollars to limit Treasury sales.
- The yen had slid to multi-decade lows near 163 per dollar before rebounding toward 157 after the coordinated move.
- A giant carry trade, borrowing cheap yen to buy higher-yielding assets, once topped an estimated 1.5 to 2 trillion dollars and unwound violently in August 2024.
- Rising Bank of Japan rates, now at 1 percent, raise the cost of that trade and threaten to force more unwinding.
- The intervention bought time and helped feed the S&P 500 run to record highs, but it did not fix the underlying pressure.
The US Treasury bought yen in early August 2026, joining Japan in the first coordinated yen-buying operation since 1998, and that steadied a currency that had slid to multi-decade lows. That stability kept a massive borrow-cheap-yen trade from blowing up in a disorderly way, which is part of why US stocks have run to record highs. The catch is that this move bought time, not a cure.
There is a trillion-dollar loan sitting under the world's markets, and most people paying attention to Nvidia have no idea it is there. It is called the yen carry trade, and understanding it explains both the recent calm and the reason we are not popping champagne.
What the carry trade actually is
Strip away the jargon. For years the Bank of Japan held interest rates near zero, even negative. So global investors did the obvious thing. They borrowed yen for almost nothing, converted it to dollars, and bought higher-yielding assets. US stocks, US bonds, anything paying more than the cost of the loan. The gap between borrowing near zero and earning something real is the whole game.
Estimates put the notional size of this trade north of 1.5 to 2 trillion dollars at its 2024 peak (Stapleton Asset Management). That is not pocket change. That is a wall of borrowed money flowing into markets around the world, and a lot of it landed in the same assets you own.
The trade works beautifully until two things happen. The yen strengthens, or Japanese rates rise. Both raise the cost of the loan and shrink the profit. When enough investors decide to get out at once, they sell the higher-yielding assets, buy yen to pay back the loan, and the whole thing reverses fast.
Why August keeps being the problem month
We saw the ugly version in August 2024. A series of developments spooked investors, the yen shot up, and the unwind hit hard. The Nikkei 225 fell 12.4 percent in a single day on August 5, its worst drop since Black Monday in 1987 (moneybycj). That was the carry trade running for the exit all at once.
Fast forward to summer 2026. The Bank of Japan has been climbing out of its decades-long experiment with ultra-low rates. It scrapped its negative rate in 2024, then hiked to 1 percent in June 2026, the highest level since 1995 (Al Jazeera). Every one of those hikes makes borrowing yen more expensive and puts more pressure on anyone still holding the trade.
Then the yen weakened badly again, sliding to 163.73 per dollar before the intervention (CNBC). Weak yen sounds like Japan's problem, and it is. It makes oil, food, and everything Japan imports more expensive (Axios). But a wildly swinging yen is a global problem, because it threatens to trigger another disorderly unwind.
What Washington actually did
Japan stepped in first, and central bank data suggested it may have sold as much as 58.97 billion dollars to buy yen in a single day (CNBC). That is the range Heath's inbox has been asking about. Then something unusual happened. The US joined in.
The Federal Reserve Bank of New York, acting for the Treasury, sold euros for yen through Goldman Sachs and Morgan Stanley (CNBC). Read that again. The US used euros, not dollars, to buy yen. That was deliberate. Selling dollars would have meant selling Treasuries or dollar reserves, and Washington did not want to add that pressure to its own bond market (OMFIF). Using euros let the US help without shooting itself in the foot.
Bessent said the US strongly supported Japan's steps to correct the yen's undervaluation (Al Jazeera). President Trump framed the participation as a gesture of support for Japan. The yen rebounded to 157.57 by Friday (CNBC). Order restored, for now.
Why this fed the market run
Here is the connection to your account statement. When the yen stabilized, the carry trade stopped threatening to detonate. Add cooler-than-expected inflation, with both CPI and PPI coming in soft, plus solid corporate earnings, and you get the result we are living in. The S&P 500 pushed to an intraday record above 7,800 in mid-August 2026 (Intellectia), and the Dow crossed 54,000 (CNN).
A stable yen is not the only reason for the run. But it removed a large, specific risk that could have knocked the whole thing over. That matters.
Can the party continue
It can. That is the honest answer. But we want you to hold two ideas at once.
Intervention buys time, it does not change the long-term trajectory. State Street's analysts said as much (CNBC). The Bank of Japan is still flagging upside risks to prices and signaling it could hike faster (Bloomberg). Every hike tightens the screw on the carry trade. Japan also said future intervention would run through the Fed's swap arrangement (OMFIF), which tells you both sides expect to be back at this again.
So the setup is calmer, not fixed. The trade that crashed markets in August 2024 has not gone away. It is smaller and better understood, but the machinery is intact.
What we tell clients is simple. Do not chase this run because a currency got propped up, and do not flee it either. A diversified plan already absorbs shocks like a yen spike. The people who got hurt in 2024 were the ones fully exposed to one trade with no cushion. If your allocation only works when the yen behaves, that is not a plan, that is a bet.
We watch the yen the way we watch a fault line. Quiet does not mean gone.
If you want help running this for your own plan, our team at Compound Advisory does this work every week.
Ready for a clearer retirement strategy? Schedule your complimentary Retirement Clarity Assessment at https://compoundadvisory.co/retirement-clarity-assessment.
Frequently Asked Questions
What is the yen carry trade in plain terms?
Investors borrow yen at very low interest rates, convert it to dollars, and buy higher-yielding assets like US stocks and bonds. The gap between cheap borrowing and higher returns is the profit, until the yen jumps or Japanese rates rise.
Why did the US buy yen instead of Japan doing it alone?
Japan was already spending heavily to prop up its currency. The US joined to help smooth the swings without adding more stress to global markets, marking the first joint yen-buying operation since 1998.
Why did the US use euros instead of dollars to buy yen?
Selling dollars would have meant selling Treasuries or dollar reserves, which Washington wanted to avoid. Using euros let the US support the yen while limiting pressure on the Treasury market.
How did this connect to the record run in US stocks?
Stability in the yen kept the carry trade from unwinding in a disorderly way, and cooler inflation data added fuel. Together those pushed the S&P 500 to new highs in mid-August 2026.
Can this calm continue?
It can, but intervention buys time rather than changing the trajectory. Rising Bank of Japan rates keep pressure on the trade, so the risk of another sharp move has not gone away.