Japan and the USA: a strategic partnership. The European Union?

Prof univ dr Basil NEACȘA,
Bruxelles

The second significant event mentioned in the previous article, which we shall analyze, is the joint action taken by the US Treasury and the Japanese Government to intervene and halt the yen’s depreciation to new lows. (1). This event, together with the other two events (2), highlights the extent of US involvement and its focus on the Indo-Pacific region, not only from a military perspective – as we are accustomed to – but also from an economic and financial perspective, given the ongoing war with Iran, which is draining its financial reserves at a colossal rate (375 million dollars a day). These implications stem the growing regional economic uncertainties, given that Japan is one of the main drivers of the regional and global economy. They have global repercussions, implicitly affecting the balance of financial and geopolitical power on a global scale, where the US is in direct competition with China, the dominant economic power in the region.

On 31 July 2026, in a relatively low-key manner and without much ceremony, Mr. Satsuki Katayama, Japan’s Minister of Finance, on behalf of the Japanese Ministry of Finance, and Mr. Scott Bessent, US Secretary of the Treasury, on behalf of the US Department of the Treasury, announced a joint initiative to support the yen, which had fallen to its lowest level since 1986. The aim was essentially to limit the increases in import prices, which were fueling general inflation and affecting household budgets, and indirectly undermining the popularity of the current government, which is favorably disposed towards the United States.

Rather curious is the discretion with which the event took place. At such a high level, Western central banks and finance ministries usually consult with one another before intervening in the foreign exchange markets. Also, the small circle of people involved means that their moves are always coordinated down to the smallest detail, and their actions are grandly staged on the international stage.

On Monday 3 August, after a weekend spent with her family, the President of the European Central Bank (ECB), Ms. Christine Lagarde, arrived at her imposing office, the Skytower, in Frankfurt to learn from the international press about the joint US-Japanese action.

But this was not the only surprise in store for her. The United States had sold ‘euros’ from its international reserves to finance the purchase of yen, without even informing the ECB (3). This was unprecedented until then.

A brief phone call initiated by Ms. Lagarde to seek an explanation elicited an unequivocal response from her American counterpart, Scott Bessent: ‘The Treasury takes decisions regarding its Currency Stabilization Fund, used for intervention, solely in Washington and does not coordinate with foreign authorities’ (4).

It is estimated that Japan spent approximately 52.8 billion dollars, whilst the United States’ contribution appears to have been between 5 and 10 billion dollars. (5)

Basically, the joint Japanese-American intervention – the first of its kind since the one in 2011 following the Fukushima disaster – was aimed at rescuing the yen, which had been depreciating for some time. An attempt at stabilization initiated by Japanese financial institutions failed in May 2026. The only options available to the Japanese government were assistance from the US or the sale of US foreign debt. But selling US bonds on the open market would have indirectly contributed to rising inflation in the US, which would have led to higher interest rates and thus a slowdown in production, resulting in a rising unemployment rate, which currently stands at 4.2% (in the US, the official unemployment rate -U-3- includes only those who are out of work, available for work and have actively sought employment in the last four weeks. Millions of unemployed people who wish to work are not registered as unemployed because they do not meet these criteria). Hence, on the one hand, this move has helped to prevent a rise in inflation in Japan – which currently stands at 2 per cent, with public debt having reached an all-time high of 73 billion dollars – and has strengthened the yen on global foreign exchange markets, particularly against the euro (commercial exchanges with Japan exceeded 190 billion euros and the balance of trade is roughly in equilibrium) (6).

On the other hand, it has prevented a rise in inflation in the US, where important elections are due to take place at the end of this year.

All these events are taking place within a context in which China has helped stabilize global oil prices by utilizing its own “hidden” storage reserves (7), which has enabled production to continue in Japan (which imports 95.9 per cent of its oil from the Gulf) (8) in a market where the Chinese monopoly is becoming increasingly strong and where the pressure exerted by China on its foreign partners to comply with its ‘traditional’ rules is mounting (9).

China’s message was clear. Sell your US bonds and join us. We have resources (China, Russia), we have oil (Russia, Iran, Saudi Arabia), we have technology (China) and we have money (China, Saudi Arabia) … we will dominate the world. Japan’s response was equally clear: the US is our strategic partner. We have technology (the US, Japan), we have oil (the US, Venezuela and several Gulf states), and we have money (the US and Japan).

Viewed from a European perspective, given that Japan and the EU are “strategic partners” on the paper– having even signed a “Security and Competitiveness Alliance” pact in July 2025 – this event could have marked a major first step towards strengthening relations between the two strategic partners. The strengthening of the yen would have been an implicit outcome, but on the other hand it would have given an international dimension to the ‘single currency’, which currently lacks this dimension. However, Japan chose the United States for geostrategic reasons, but above all because of the global financial architecture centered on the dollar. The Bessent–Trump partnership worked perfectly, acting with remarkable speed and against a backdrop of total discretion. Whilst Treasury Secretary Scott Bessent dealt with the technical and political messages, Trump provided the political framework.

‘We will not hesitate to participate in further joint interventions,’ declared the US Treasury Secretary, whilst the US President stated, ‘We always stand with Japan’ (10).

Would the EU, together with the ECB, have been able to carry out such an operation with the same level of financial scale, speed and discretion?

Conclusions

1. Japan is the US’s largest foreign creditor, with $1.14 trillion, followed by the UK with $0.95 trillion and China with $0.66 trillion. Until 2019, China was the largest creditor, holding 1.3 trillion, at which point it began to de-dollarize to strengthen its own currency, the renminbi. The ‘people’s currency’ (renminbi) gained 9 per cent of the foreign exchange market in 2025.

2. Japan is the largest foreign creditor, not the largest creditor overall. The bulk of US federal debt is held domestically by American households, banks, pension funds, investment funds, companies, the Federal Reserve and government institutions. Consequently, no foreign country ‘controls’ US debt, which could potentially be used as direct political leverage. EU countries (27 member states) and European investors together hold approximately $1.7 trillion in US Treasury securities. However, as most of these assets are in private hands and are fragmented across different jurisdictions, this does not translate into direct political leverage for EU governments. Certain people in European academic or political circles speculate that the EU could use this leverage in negotiations with the United States (11). Wrong! As an element in the negotiation process, it brings no added benefit to the EU. On the contrary, hypothetically, if the sale were to go ahead, it would lead to the self-destruction of the EU’s political and financial structures. This is because the US could intervene with quantitative easing to stabilize yields and curb inflation. Instead, by strengthening the euro, the EU would make its exports more expensive, particularly for products that are already on the verge of losing their competitiveness. This would destroy production, and the social impact would be incalculable (“the snowball effect”). Surely the EU will make an enemy for life who will impose ever-increasing customs duties on it.

3. The euro has not performed as expected as a global currency, not because Europe’s economy is small – it is not – but because the eurozone was constructed as a monetary union without the political, fiscal and financial foundations underpinning a true reserve currency. The dollar’s dominance is structural; the euro’s limitations are likewise structural.

4. The US has treated the euro as a fungible reserve asset that can be used at Washington’s discretion, not as a currency whose issuer has a say in the matter. The US dollar remains the global benchmark currency even as other currencies attempt to match it.

Recommendations for your portfolio

The Swiss franc has proved to be the best safe-haven currency over the last 10 years from all economic and financial perspectives (low inflation, a neutral political system, low public debt, a stable central bank rate, and consistently rising net international investment).
For a long-term investment, the Norwegian krone (NOK) is an excellent choice. Norway is an oil exporter, has a sovereign wealth fund ranked amongst the world’s largest, wages have been indexed by 4.4% again this year, and inflation has fluctuated relatively little over the last two years (2.7%–2.00 % ).

Enjoy life just as it is !

PhD Professor

Basile Neacsa