Episode summary
Brad Setser on the US's Unusual Japanese Yen Intervention | Odd Lots
Odd Lots
· · 42 min · Hosts: Joe Weisenthal, Tracy Alloway · Guests: Brad Setser
Summary
The episode examines the unusual joint US-Japan effort to support the yen after its sharp slide, including Treasury Secretary Scott Bessent’s decision to sell euros rather than dollars and the use of the Fed’s foreign repo facility. Brad Setser argues the move makes sense because the yen had become extremely weak, the Bank of Japan has been slow to raise rates, and the intervention can help reset expectations around levels near 160.
Setser places the yen’s decline in a broader East Asian context, where strong trade and current-account surpluses have still not translated into strong currencies. He says Korea and Taiwan have been especially affected by equity flows, hedging behavior, and central-bank management, while Japan’s weakness is driven by low rates and large unhedged foreign assets held by official institutions. He also argues that the standard “fiscal doom” story is overstated because Japan’s primary balance has improved materially.
On effectiveness, Setser says intervention alone is unlikely to be enough unless the Bank of Japan raises rates further. But he thinks the yen could stabilize if rate differentials narrow and Japanese institutions begin to repatriate more income. He also defends the Fed repo facility as a useful backstop that lets foreign central banks raise dollars without dumping Treasuries into the market.
Key takeaways
- Brad Setser says the yen is at historically weak levels and that intervention is most credible as a warning around 160, not a promise to defend a hard peg.
- He argues the Bank of Japan’s slow pace of rate hikes is a central reason the yen weakened, and that intervention works best if the BOJ keeps tightening.
- Setser says East Asian currency weakness is being driven less by classic speculation and more by hedging, capital flows, and official asset management.
- He pushes back on the idea that Japan’s fiscal position is deteriorating dangerously, saying the primary balance is now roughly flat and better than in several G7 peers.
- Setser defends the Fed’s foreign repo facility as a useful tool because it lets central banks obtain dollars without forcing immediate Treasury sales.
Notable quotes
“the yen was uh the one of the lowest yielding currencies. So, you it was a typical funding currency”
“Japan has a current account surplus of 5% of GDP. It's investment income, it's not trade”
“we're supporting the yen from an incredibly weak level. It's arguably overshot”
“central banks have a lot of really good collateral. Uh and if they need cash, they don't actually have to go and sell the Treasuries into the cash bond market”
How the episode opens
Bloomberg Audio Studios. Podcasts, radio, news. — Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. — And I'm Joe Weisenthal. — Joe, I think I know the answer to this question, but do you ever write to-do lists?
No. — Yeah. — I figured. — No, I'm not. No. — Uh well, I make a half-hearted attempt every day where it's like podcast recording one, podcast recording two, do the newsletter, reply to the following emails. — Yeah. — But uh as of last week, I have seen the most epic to-do list ever.
Oh, yes. Yes. — Presumably you saw this. — Yeah. Yeah, that I saw the uh the Scott Bessent to-do list, and it was basically like buy the yen, right? — Right. So, US Treasury uh secretary — To-do list. — Scott Bessent, uh there was a photo taken of him. Presumably he did this on purpose. One would hope, but he had a to-do list, uh and it basically just said buy Japanese yen, and he put in the JPY
Yeah. So, there's no no ambiguity. — After 5 to 10 billion. — Um yeah, so it was pretty clear that he was not referring to personal purchases in some vacation stuff. — The only thing on the Treasury secretary's to-do list, he he's not that busy, right?
Um he's not, but he presumably is fairly busy. We know that the yen had been weakening dramatically. We know that there's been a recent sharp strengthening. There's always talk of a yen intervention here and there. I don't really understand fully why the yen is so weak, why the US feels compelled that it's important to get involved in that market, etc.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- yen intervention
- bank of japan rates
- east asian currency weakness
- federal reserve repo facility
- japan fiscal outlook
Watch the episode
Watch “Brad Setser on the US's Unusual Japanese Yen Intervention | Odd Lots” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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