The Japanese yen has weakened to its lowest level against the US dollar since 1986, a move that is likely to heighten concerns among policymakers and keep market participants alert for the possibility of official intervention to support the currency.During overnight trading in New York, the yen slipped past the 161.95-per-dollar level, falling below the low recorded in July 2024 when Japanese authorities had previously stepped in to stabilize the exchange rate. The currency continued to weaken in Tokyo on Tuesday, touching 162.40 against the dollar despite verbal intervention from Chief Cabinet Secretary Minoru Kihara. Remarks later made by Finance Minister Satsuki Katayama had little immediate effect on the market.
Yen at record low
According to a Bloomberg report, the last time the yen traded at these levels, it was moving in the opposite direction, strengthening during a prolonged rally that followed a currency agreement brokered by the United States.At that time, Japan’s asset-price bubble was still taking shape, the Soviet Union was dealing with the aftermath of the Chernobyl nuclear disaster, and the release of Top Gun had just propelled Tom Cruise to the heights of Hollywood fame.The current situation stands in sharp contrast. The yen has been steadily depreciating as Japan gradually emerges from decades of economic stagnation. While the weaker currency has boosted the earnings of export-oriented companies and contributed to record highs in the country’s stock market, it has also increased the cost of imports, particularly oil and natural gas priced in US dollars.The resulting rise in inflation has pushed up the cost of essentials ranging from food to electricity, placing additional pressure on households and posing a political challenge for Prime Minister Sanae Takaichi’s government.“Today’s focus will be whether Japanese authorities move ahead with actual intervention or stronger verbal warnings,” said Yujiro Goto, Chief FX Strategist at Nomura Securities.The yen has continued to lose ground despite the Bank of Japan’s policy shift in 2024, when it ended its long-standing negative interest rate regime—a move that had initially fuelled expectations of a sustained recovery in the Japanese currency.The Bank of Japan (BOJ) raised its benchmark interest rate to 1% on June 16, marking its highest level since 1995. However, the move had little impact on the currency, as markets continue to expect the US Federal Reserve to maintain a hawkish policy stance. With Japan’s interest rates still far below those in the United States and other major economies, investors remain incentivised to borrow in yen at low cost and invest in higher-yielding overseas assets. This carry trade continues to fuel capital outflows and weigh on the Japanese currency.Market participants are also increasingly concerned that the Japanese government prefers the BOJ to adopt a gradual approach toward further rate hikes. One indication of this is its plan to call for “appropriate” monetary management in its upcoming basic policy guidelines.The yen has remained under sustained pressure despite the Japanese government’s record intervention of ¥11.73 trillion ($72.4 billion) between April 28 and May 27, after the currency weakened beyond the 160-per-dollar mark. According to Finance Ministry reserve data, the intervention was likely financed by drawing on Japan’s foreign asset holdings, including US Treasury securities.
Intervention on the cards?
Attention has now shifted to whether authorities will intervene again. Although the yen’s move beyond 161.95 per dollar during New York trading on Monday pushed it out of its recent trading range, it has not yet triggered a more pronounced sell-off in the currency.The scale of the previous intervention highlights both the importance Japan attaches to defending the yen and the challenge of influencing a global foreign exchange market where roughly $9.5 trillion changes hands each day.The conflict involving the US, Israel and Iran this year has added another layer of pressure on the Japanese currency. As Japan imports almost all of its energy, with most of its crude oil sourced from the Middle East, the country remains particularly vulnerable to disruptions in the region.Although hopes of a peace agreement have eased pressure on oil prices, they have provided little support to the yen. Structural factors—particularly the wide interest rate differential—continue to dominate currency movements.Japan’s ageing and shrinking population has also weakened the country’s long-term growth outlook while contributing to an expanding public debt burden, factors that many believe limit the scope for substantial increases in interest rates.On June 19, Japanese Finance Minister Satsuki Katayama reiterated that authorities stood ready to take “bold action” to counter excessive speculative movements in the foreign exchange market. She also said that Japan and the United States are becoming increasingly “aligned” on currency policy following her discussions with US Treasury Secretary Scott Bessent, with both sides agreeing to take “bold steps” if necessary.Previous rounds of intervention—in 2022, when Japan entered the market to support the yen for the first time since 1998, and again in 2024—provided only temporary relief before the currency resumed its downward trend. During the latest intervention campaign, which began on April 30, Japanese authorities stepped into the market on multiple occasions in an effort to stabilise the yen.Despite official attempts to curb the currency’s decline, a weaker yen could deliver a significant boost to Japan’s automobile manufacturers. Toyota Motor Corp. estimates that every ¥1 depreciation against the dollar increases its operating profit by approximately ¥50 billion, suggesting the company could receive a windfall of about $5.8 billion this year if the currency remains weak.
