The persistent weakening of the yen has become a growing concern for Japanese policymakers, as the currency's decline pushes up import costs and household expenses. This issue has now also captured the attention of the United States. In late April, Japanese authorities intervened in the foreign exchange market with nearly 74 billion yen to support the currency, which had been depreciating sharply for two consecutive months.
However, that rebound proved short-lived, and by July 23, the yen had fallen to its lowest level against the dollar since 1986. This ultimately triggered one of the most notable interventions in global currency markets in decades—a joint effort by Japan and the US to shore up the yen, with both countries warning they would act again without hesitation if necessary to defend the exchange rate.
What is driving the yen's weakness?
Multiple factors are continuously weighing on the yen. Chief among them is the interest rate differential between Japan's ultra-low rates and those of major economies like the US. This gap encourages investors to borrow yen at low cost and invest in higher-yielding assets overseas, creating a persistent capital outflow that pressures the currency. Although the Bank of Japan raised its benchmark rate in June to its highest level in 31 years, Japanese rates remain low by international standards.
Meanwhile, investor concerns about Japan's fiscal outlook have further intensified the pressure on the yen. Japan's government debt has surpassed 200% of GDP, the highest among major economies, and persistent fiscal deficits raise fears that government spending is unsustainable. These worries could undermine investor confidence in Japanese assets and the yen itself. The conflict between the US and Iran has also added to the yen's decline. Japan relies on imports for nearly all its energy needs, with most crude oil coming from the Middle East, making it highly vulnerable to regional instability. Higher oil prices mean Japan must spend more dollars on energy, increasing demand for foreign currency and weakening the yen. Additionally, the Middle East conflict has fueled global inflation, altering market expectations for US interest rate policy—shifting from anticipated rate cuts to potential hikes. This further boosts the appeal of dollar-denominated assets, putting more downward pressure on the yen.
Why is the weak yen a concern?
Over the past decade or so, the yen's sustained depreciation has made Japan a more affordable destination for millions of foreign tourists and boosted profits for major exporters. However, for an economy heavily dependent on energy and raw material imports, a weak yen also raises import costs, exacerbates inflation, increases household living expenses, and squeezes profit margins for domestic-focused companies. This cost-of-living crisis has contributed to the downfall of two Japanese prime ministers, paving the way for the current leader, Shigeru Ishiba. Moreover, there is growing concern that inflation in Japan is becoming more entrenched. Japanese officials see increasing signs that companies are passing on cost increases to consumers more quickly than in the past.
Why is the yen's weakness a problem for the US?
US President Donald Trump has repeatedly criticized the yen's weakness, arguing it gives Japanese manufacturers an unfair competitive advantage in trade. This issue has also been a topic in US-Japan trade talks. In March of last year, Trump took a tougher stance by suggesting he could respond with tariffs on Japanese goods. However, the US decision to assist in supporting the yen in late July marks a shift in Washington's stance. Trump indicated that the joint currency intervention was a sign of goodwill between Washington and Tokyo. For the US, the problems caused by a weak yen extend beyond trade. Japan is the largest foreign holder of US Treasury bonds. If Japan sells off these bonds to raise funds for currency intervention and to support the struggling yen, it could depress US Treasury prices and raise US borrowing costs. This comes at a time when US lending costs are already facing upward pressure due to inflationary spikes from the Iran war.
What actions has Japan taken to bolster the yen?
To curb the yen's decline, Japan has employed a range of measures, the most direct being market intervention. Direct intervention involves authorities buying or selling the domestic currency in the foreign exchange market to influence exchange rates. Such actions send a signal to the market that the government will not tolerate excessive volatility and can deter speculators, preventing a runaway depreciation or rapid appreciation. Over the years, Japan has intervened in the currency market many times to influence the yen's value. Historically, the government more often intervened to weaken the yen; in recent years, the focus has shifted to supporting it. Before the interventions this year, Japan's last major market intervention was in 2024, when the government spent nearly 100 billion yen buying the yen to support the exchange rate. All four interventions that year occurred when the dollar-yen rate approached 160, establishing this level as a widely recognized "red line" for intervention. However, influencing the exchange rate does not always require actually buying or selling yen. Sometimes, ahead of or even instead of direct intervention, senior Japanese officials will issue "verbal interventions"—warnings to the market to remind speculators that the government will not tolerate excessive speculation. Comments from the Finance Minister or senior Finance Ministry officials in charge of exchange rate policy can often be enough to trigger rapid market movements. Japanese officials typically escalate their language gradually, signaling how close they are to actual intervention. Mentioning that they are "prepared to take decisive action" often means intervention is imminent.
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