Global Affairs Session 74 7 August 2026

IRAN WAR REACHES JAPAN

US spooked with Yen collapse

Japan is caught in an unusual geopolitical-financial trap: the yen has fallen to four-decade lows, the Iran war has disrupted the Strait of Hormuz, and Japan’s dependence on Middle Eastern crude magnifies the cost of a weak currency. The United States has joined Japan in buying yen because a disorderly Japanese crisis could spill into Asian currencies and the U.S. Treasury market.

Japan trapped Order effects Yen collapse Iran war and energy Japan fights back America buys yen Treasury-market risk

Japan trapped miserably

Japan is caught in an unusual geopolitical-financial trap.

The yen has fallen to four-decade lows because U.S. interest rates remain much more attractive than Japanese rates. Then the Iran war disrupted the Strait of Hormuz, magnifying Japan’s vulnerability because it imports around 95% of its crude from the Middle East.

A weak yen makes dollar-priced oil even more expensive. Japan has spent billions defending its currency, but its huge public debt limits aggressive interest-rate increases.

So the United States has joined Japan in buying yen, because a disorderly Japanese crisis could spread across Asian currencies and eventually destabilise the enormous U.S. Treasury market.

First Second Third Fourth Fifth order effects!

1. First-order effect: Iran war → Strait of Hormuz disruption → oil/shipping shock.
2. Second-order effect: Japan’s energy import bill rises → inflation and economic pressure increase.
3. Third-order effect: Yen weakens further → Japan intervenes → U.S. gets involved because of Treasury-market and Asian-currency risks.
4. Fourth-order: Japan’s intervention affects U.S. Treasuries, American bond yields, Asian currencies and global capital flows.
5. Fifth order: Higher global yields + weaker Asian currencies + expensive energy → slower growth, inflation pressure, central-bank policy changes and potentially greater geopolitical tensions.

So: War → Energy → Economy → Currency → Global finance → Geopolitical realignment.

Why has the Japanese yen collapsed

• What is happening? The yen fell to around ¥164 per dollar, its weakest territory in roughly four decades.
• The interest-rate gap: Investors can generally earn higher yields in the United States than in Japan, making dollar assets more attractive.
• The carry trade: Investors borrow cheaply in yen and invest the money in higher-yielding assets elsewhere.
• Sell yen, buy dollars: That trade creates continuing selling pressure on the Japanese currency.
• Japan has started raising rates: The Bank of Japan has lifted its policy rate to 1%, but the gap with U.S. rates remains important.
• Intervention cannot change fundamentals: Japan can suddenly buy yen and frighten speculators, but lasting recovery probably requires narrower interest-rate differentials and stronger economic fundamentals.

The Iran war transforms a currency problem into an energy crisis

• Japan has an energy weakness: Japan has very little domestic oil and depends heavily on imports.
• Around 95% comes from the Middle East: That makes Japan one of the advanced economies most exposed to Gulf instability.
• Hormuz is Japan's lifeline: Roughly 70% of Japan's imported oil normally passes through the Strait of Hormuz.
• The Iran war disrupted that route: Shipping through Hormuz plunged after the U.S.-Israeli conflict with Iran began on 28 February 2026.
• Oil is priced in dollars: Japan therefore faces a double hit: disrupted/expensive oil plus a weak yen against the dollar.
• Energy security becomes currency security: Every geopolitical shock in the Gulf can increase Japan's import bill, inflation and pressure on the yen. Japan has already drawn on oil reserves and secured alternative supplies, including much larger volumes from the United States.

The simple chain: Iran war → Hormuz disruption → oil risk ↑ → Japan's import bill ↑ → demand for dollars ↑ → pressure on yen ↑.

Japan fights back, but discovers the limits of economic power

• Japan buys its own currency: To strengthen the yen, Tokyo sells foreign currency/assets and buys yen in the market.
• Record intervention: Japan spent a record ¥6.28 trillion on April 30 alone buying yen.
• The effect was temporary: The yen recovered sharply - but later fell back to new four-decade lows.
• Another enormous intervention followed: Market and central-bank data suggested extremely large intervention again around late July.
• Why not simply raise rates dramatically? Because Japan carries enormous government debt; much higher rates increase borrowing and debt-servicing costs.
• The central contradiction: Japan needs higher interest rates to support the yen, but high rates could damage an economy built for decades around extremely cheap money. Japan's intervention can therefore buy time but cannot manufacture economic fundamentals. Japan possesses enormous financial resources. But even enormous reserves cannot permanently defeat the global interest-rate market.

Then something extraordinary happens: America buys yen

• Washington enters the battle: The United States and Japan conducted a rare coordinated yen-buying intervention.
• Why is this extraordinary? The two countries had not conducted coordinated FX intervention together since 2011; U.S. action specifically supporting a falling yen recalls the intervention of 1998.
• America sold euros: Rather unusually, the U.S. Treasury reportedly sold euros to buy Japanese yen, rather than simply selling dollars.
• A powerful political signal: Treasury Secretary Scott Bessent said Washington was prepared to do “whatever it takes” to support stability.
• The market got the message: The yen rallied sharply because traders now had to consider intervention by two governments, not just Japan.
• Economic alliance becomes strategic alliance: The U.S.-Japan security relationship is therefore expanding beyond aircraft carriers, bases and missiles into currency and financial-market coordination.

Japan can shake the U.S. Treasury market

• Japan owns enormous U.S. assets: Japan is one of the world's most important foreign holders of U.S. government securities.
• Japan needs dollars for intervention: To buy yen, Japan must obtain/use foreign currency, traditionally drawing on its enormous reserve portfolio.
• What if it sells Treasuries? Large-scale Treasury liquidation could push U.S. government bond prices downward.
• Bond prices down = yields up: Higher Treasury yields mean potentially higher financing costs across mortgages, businesses and the U.S. government itself.
• Washington therefore has a self-interest: The U.S. does not want Japan's currency defence to create another problem inside America's own bond market.
• The Fed has another tool: Its FIMA repo facility can allow foreign monetary authorities to raise dollar liquidity against Treasury securities rather than having to sell those securities outright. This is one reason analysts see the intervention as having implications far beyond USD/JPY. Reuters noted concern that large Japanese action could spill into already-sensitive U.S. Treasury yields.

Value addition

Glossary and related terms

Interest-rate gap

The difference between U.S. and Japanese interest rates that makes higher-yielding dollar assets more attractive when the gap is wide.

Carry trade

Borrowing cheaply in yen and investing the money in higher-yielding assets elsewhere.

Foreign-exchange intervention

Government or central-bank buying and selling of currencies or foreign assets to influence the exchange rate; in this session Japan buys yen to support it.

Strait of Hormuz

The Gulf shipping route described in the session as Japan's energy lifeline, through which roughly 70% of Japan's imported oil normally passes.

Energy security becomes currency security

The session's idea that expensive or disrupted imported energy raises Japan's dollar needs, import bill, inflation and pressure on the yen.

U.S. Treasuries

U.S. government securities held in large quantities by Japan and other investors; large sales can push bond prices down and yields up.

FIMA repo facility

A Federal Reserve facility described in the session as allowing foreign monetary authorities to raise dollar liquidity against Treasury securities instead of selling them outright.

First-order to fifth-order effects

A chain used in the presentation to trace how war can move through energy, the economy, currencies, global finance and ultimately geopolitical realignment.

Value addition

Conceptual references

• The U.S.-Japan interest-rate gap, carry trade and continuing pressure on the yen.
• Japan's dependence on Middle Eastern oil and the Strait of Hormuz as an energy-security vulnerability.
• Foreign-exchange intervention, public-debt constraints and the limits of defending a currency without changing fundamentals.
• Rare coordinated U.S.-Japan yen-buying intervention and the extension of strategic cooperation into financial markets.
• Japan's U.S. Treasury holdings, bond-price and yield effects, and the Federal Reserve's FIMA repo facility.
• The presentation's first-order through fifth-order cascade from war to geopolitical realignment.