Why the U.S. stepped in after decades to prop up Japan's yen — and what's at stake

Washington's decision to join Japan in supporting the battered yen has prompted questions over what motivated the rare coordinated intervention, with analysts pointing to concerns over U.S. Treasury markets and Japan's financial system.

Tokyo has grown increasingly wary of the yen's decline, which recently dropped to its weakest level against the dollar in nearly four decades. The yen had been hovering at multi-decade lows, sliding to 163.73 per dollar last Thursday before rebounding to 157.57 Friday.

The coordinated intervention was the first U.S.-Japan joint operation to buy yen since 1998, and the first coordinated intervention involving the two countries since the G7 acted to weaken the yen after the 2011 earthquake.

Industry veterans told CNBC that one of Washington's biggest concerns was avoiding a scenario where Japan would need to dump large quantities of Treasuries to finance unilateral intervention, given how the North Asian nation is the largest foreign holder of U.S. government debt.

Louise Loo, head of Asia economics at Oxford Economics, said that that was "possibly one of the key reasons" behind U.S. participation. "There is a self-preservation element here. Volatile markets driven by potentially fiscally-aggressive policies from Japan could extend to the U.S. Treasury markets, destabilizing the dollar."

Tokyo's and Washington's emphasis on the Federal Reserve's standing FIMA repo facility — which allows foreign central banks to obtain dollar liquidity without selling Treasuries outright — "was a clue that they'd like to avoid forced-selling as much as possible," she said. Japan's finance ministry said Monday it plans to use the FIMA repo facility for future interventions.

Masahiko Loo, senior macro strategist at State Street, said the signal "may be bigger than the intervention itself." Washington's concerns likely extend beyond the yen, he added. A persistently weak yen could trigger further selling in Japanese government bonds, with higher yields spilling over into global bond markets at a time when both Japan and the U.S. are grappling with rising long-term borrowing costs.

Yields of the U.S. 10-year Treasury have gained almost 57 points since the start of the year.

President Donald Trump said that the U.S. had participated in last week's coordinated intervention to support the yen as a gesture of support for Japan and in the interest of global economic stability.

Beyond protecting U.S. bond markets, the intervention also reflected Washington's broader economic and geopolitical priorities. Loo noted the U.S. has repeatedly argued the yen is "substantially undervalued," providing it an incentive in correcting what it sees as an unfair trade advantage as it makes Japanese exports more competitive.

Loo added that if Washington believes Japan's fiscal policies are feeding into higher JGB yields a...