The yen fell to its lowest level against the dollar since 1986, a milestone that is likely to spark unease in Japan and heighten traders’ vigilance over potential market intervention by authorities.
In overnight New York trading, the yen weakened below 161.95 against the dollar, breaking through the low point reached in July 2024 during a previous intervention aimed at supporting the currency. The decline continued into Tokyo’s Tuesday trading session, with the yen falling to 162.40, despite appeals from Chief Cabinet Secretary Kihara Minoru. Subsequently, remarks by Finance Minister Katayama Itsuki also failed to immediately stem the slide.
The last time the yen fell to such a high level, it was moving in the opposite direction—driven by a U.S.-brokered currency agreement that triggered a multi-year surge in the yen. The world back then was vastly different from today—Japan’s asset bubble was still forming.
This time, the weakening yen is lifting Japan out of a prolonged economic slump that has lasted for a generation. The weaker currency has boosted profits for exporters, in turn driving the Japanese stock market to record highs.
However, import costs are soaring, particularly for oil and gas transportation priced in dollars. The resulting inflation is hurting consumers, as prices for everything from food to electricity are rising, which could undermine support for Prime Minister Fumio Kishida’s administration.
Yujirou Gotō, chief foreign exchange strategist at Nomura Securities, said: “Today’s focus will be whether Japanese authorities will take actual intervention measures or issue stronger verbal warnings.”
Despite the Bank of Japan’s leadership change and its announcement to end negative interest rates by 2024, the yen continues to decline—a shift that had once raised expectations for a yen recovery.
On June 16, the Bank of Japan raised its benchmark interest rate to 1%, the highest level since 1995. However, the impact of this rate hike has been minimal, as traders anticipate that the Federal Reserve will continue maintaining a hawkish stance in the future. As long as Japan’s ultra-low interest rates remain significantly lower than those in the United States and other major economies, investors will have an incentive to borrow yen at low cost and invest in higher-yielding overseas assets. The resulting capital outflows will continue to exert downward pressure on the yen.
Moreover, there are concerns that the Japanese government wants the Bank of Japan to slow down its pace of further interest rate hikes. The latest indication is that the government will call for “appropriate” monetary policy measures in its basic policy guidelines.
The massive intervention spending not only highlights the scale of risks Japan faces, but also underscores the difficulty of going against the current in the global foreign exchange market, which turns over $9.5 trillion daily.
