The Japanese Yen has dropped to its weakest level against the US dollar in nearly four decades, raising concerns that Japan may once again step into the currency market to slow the fall.
The yen slipped to ¥162.41 per dollar in Tokyo trading on Tuesday after touching ¥161.97 in New York overnight. Its weakest level since December 1986. The fall came despite Bank of Japan (BOJ) raising interest rates to 1%, the highest level since 1995. The value of Japanese currency has depreciated compared to a weakened rupee. Now, 1 rupee is equivalent to 1.71 yen – a one-year low.
The weakness has revived debate over whether Japanese authorities will intervene in the foreign exchange market. However, analysts say that even if intervention happens, it is unlikely to change the currency’s long-term direction.
Yen falls to its weakest level since 1986
Despite expectations that Japanese authorities would intervene once the currency crossed ¥160, the government limited itself to verbal warnings. “We will take appropriate action at any time, as necessary,” Finance Minister Satsuki Katayama said at a news conference on Tuesday. Katayama added that during a recent call with US Treasury Secretary Scott Bessent, both sides confirmed that a “decisive measure” would be used when needed. Some analysts believe the government may be deliberately holding back stronger warnings to keep any future intervention a surprise.
Why is the Yen falling?
Japan’s policy interest rate is now 1%, but the US Federal Reserve’s benchmark rate remains between 3.50% and 3.75%. Investors can earn much higher returns by holding US assets, making the dollar more attractive than the yen. Markets also expect the Fed to keep rates higher for longer, while the BOJ is expected to raise rates only gradually, possibly once every six months.
“The dollar is the main story at the moment, and dollar/yen the key focus within that,” Lee Hardman, senior currency analyst at MUFG, told Bloomberg. “The market has moved to price in a higher chance of the Federal Reserve hiking rates, and while our view is ultimately the Fed can look through this inflation pick-up, there isn’t an immediate trigger for that unless we get softer data or Fed officials dial back the rhetoric.”
As reported by CNBC, investors borrow money in Japan at very low interest rates and invest it in countries where returns are higher. This increases the selling of the yen and buying of foreign currencies, putting further downward pressure on Japan’s currency.
Nomura’s North Asia chief investment officer, Julia Wang, said the outlook for the yen remains weak because interest-rate differences continue to support carry trades. “I don’t think it will be a material factor that derails the market,” she told CNBC, arguing that any intervention would be unlikely to change the currency’s longer-term direction.
Markets expect only slow BOJ rate hikes
Although the BOJ recently raised rates to 1%, its highest level in more than 30 years, investors believe the central bank will move very slowly from here. Because markets have already priced in gradual future hikes, the latest increase failed to provide meaningful support for the yen.
A stronger US dollar adds more pressure
The dollar has strengthened globally as investors increasingly expect the Fed could raise rates again before the end of the year. Strong US economic growth, inflation remaining above target, and expectations of tighter monetary policy have all boosted demand for the dollar.
Prime Minister Sanae Takaichi is considering cutting the consumption tax on food and beverages from 8% to 1% for two years. The proposal could cost about ¥4.4 trillion a year, adding to concerns about government finances and weighing on confidence in the yen.
Japan imports almost all of its energy, with most of its crude oil coming from the Middle East. The recent Israel-Iran conflict has heightened worries over higher energy prices and import costs, creating additional pressure on the currency.
Will Japan intervene again?
Japan’s government continues to signal that it is ready to act if currency movements become too sharp. “That includes taking decisive action, as confirmed between Japan and the US,” Katayama said. Chief Cabinet Secretary Minoru Kihara also said the government will keep working to make Japan’s economy less vulnerable to exchange-rate swings while remaining prepared to intervene if necessary.
Japan has intervened in the currency market several times over the past two years. After the yen weakened to around ¥160.72 in April, authorities reportedly spent about $73 billion to support it. Earlier, in July 2024, Japan spent around $34 billion after the yen touched ¥161.96. Both interventions temporarily strengthened the yen, but the gains faded as underlying market forces remained unchanged.
Julia Wang believes the fresh multi-decade low increases the chances of intervention. “Intervention shouldn’t be dependent on a certain level. It depends on the nature of the currency move, the nature of dollar-yen. This is a cycle high; it’s a new cycle high. It probably is a sensitive level — it will re-ignite some of the anxiety around currency weakness domestically,” she said.
Most economists believe intervention alone cannot reverse the yen’s long-term weakness. Japan’s previous interventions cost record amounts but failed to change the overall trend, because the main driver remains the large interest-rate gap between Japan and the United States. As long as US rates stay well above Japan’s and carry trades remain profitable, analysts expect the yen to stay under pressure — even if Japanese authorities temporarily slow its decline.