The Japanese yen has tumbled to its lowest point against the US dollar in four decades, crossing the 162.4 mark in Asian trading on Tuesday morning. This is the weakest the currency has been since 1986, extending a punishing slide that has persisted despite the Bank of Japan's (BoJ) efforts to stem it.
The renewed depreciation has put markets on high alert for direct intervention by Tokyo. Finance Minister Satsuki Katayama has already signalled that the government is prepared to take what she called 'appropriate' and even 'decisive' action against excessive currency moves. She added that she had confirmed with Washington that such a step remains an option, a clear hint that coordinated or unilateral dollar-selling could be imminent.
Why the Yen Keeps Falling
At the core of the yen's weakness lies the persistent gap between Japanese and American interest rates. Even after the BoJ raised its benchmark rate to 1% in mid-June—its highest level since 1995—Japanese yields remain far below those in the United States. Ten-year US government bonds currently yield around 4.5%, compared with roughly 2.6% in Japan. This differential fuels the so-called carry trade, where investors borrow cheaply in yen to invest in higher-yielding assets elsewhere, continually pushing the currency down.
A robust dollar has compounded the pressure. The greenback has drawn safe-haven demand from geopolitical tensions, including the conflict involving Iran, while expectations that the US Federal Reserve could raise rates later this year—even as the BoJ moves cautiously—have widened the divide further. Japan's heavy reliance on imported energy, which has become costlier amid elevated oil prices, has also increased demand for US dollars.
The slide is a major headache for policymakers in Tokyo, who have already deployed significant firepower. Between April and May, Japan spent a record ¥11.7 trillion (€63.3 billion) intervening in currency markets—the largest such effort on record—yet the yen continued to weaken. Domestic politics has not helped: the big-spending, growth-focused agenda of Prime Minister Sanae Takaichi has raised doubts about Japan's fiscal discipline, adding to the currency's vulnerability.
Intervention Looms, but Doubts Persist
Analysts say the immediate risk of intervention is high, given that speculative bets against the yen have climbed to multi-year peaks and a fresh four-decade low tends to sharpen political anxiety in Tokyo. However, many doubt that buying the currency would reverse its course for long, since the underlying rate gap remains firmly against it. The BoJ's next policy decision, due on 31 July, is now in sharp focus, with further rate rises seen as the more durable route to stemming the decline.
For European investors and policymakers, the yen's weakness has indirect but notable implications. A weaker yen makes Japanese exports cheaper, potentially intensifying competition for European manufacturers in sectors such as automobiles and electronics. It also affects the euro-yen cross rate, which has implications for trade and investment flows between the eurozone and Japan. Meanwhile, the broader strength of the US dollar, partly driven by the yen's decline, adds to inflationary pressures in Europe by making dollar-denominated imports—especially energy—more expensive.
The situation also highlights the limits of monetary policy in a globally interconnected financial system. As the BoJ struggles to defend its currency, the European Central Bank faces its own challenges in managing the euro's exchange rate amid divergent monetary policies across the Atlantic. The coming weeks will test whether Tokyo's resolve—and its willingness to intervene—can break the yen's downward spiral, or whether the currency's slide will continue until the interest rate gap narrows more decisively.
