The Japanese yen has tumbled to its lowest level against the US dollar in four decades, highlighting a stark reality for Tokyo: even massive spending to prop up the currency may not be enough to reverse its long-term decline.
On Wednesday, the yen weakened to 162.83 per dollar, a fresh multi-decade low. This persistent weakness underscores a difficult truth—despite potentially spending trillions of yen, the Bank of Japan alone is unlikely to steer the currency out of a prolonged depreciation trend.
Between April and May this year, Japanese authorities deployed a record 11.7 trillion yen (approximately $73.5 billion) to support the yen. As the currency plunges again, markets are on high alert for another round of intervention by Japan's Ministry of Finance.
However, numerous institutional strategists have pointed out that as long as the significant interest rate gap between the US and Japan persists and the US dollar remains broadly strong, unilateral intervention cannot reverse the yen's overarching downward trajectory. The core challenge for Japanese policymakers is not their willingness to act, but the widening divergence between the monetary policies of the Federal Reserve and the Bank of Japan.
Christy Tan, a global investment strategist at Franklin Templeton Institute, commented that intervention can only slow the pace of depreciation, curb excessive speculative positions, and signal official displeasure. It cannot alter the fundamental capital flows driven by interest rate differentials.
She explained that the carry trade is the central mechanism persistently weighing on the yen: investors borrow low-yielding yen to purchase higher-yielding US dollar assets. As long as this strategy remains profitable, the yen will stay under pressure.
Japan finds it difficult to unilaterally counteract this interest rate logic. Although the Bank of Japan has raised its policy rate to 1%, marking an end to its long-standing ultra-loose monetary policy, domestic financing costs remain far below those in the United States.
Fed's Hawkish Stance and a Strong Dollar Amplify Yen's Woes
The prevailing market expectation is that the Federal Reserve will maintain a relatively tight monetary policy for an extended period. If the US economy and inflation remain robust, there is even potential for further rate hikes.
Tan noted that there is a market consensus that the root cause of the yen's current weakness is the growing credibility gap between the policies of the Federal Reserve and the Bank of Japan.
Cross-currency movements support this view. While the yen has fallen sharply against the dollar, its performance against the euro has been relatively stable. This suggests part of the depreciation stems from broad-based US dollar strength, rather than a complete loss of faith in the yen itself.
According to LSEG data, the yen has depreciated by about 3.9% against the US dollar this year, but has fallen only 0.9% against the euro.
Martin Schulz, chief economist at Fujitsu, believes the strength of the US dollar is a key driver pressuring the yen. The muted volatility in the euro-yen exchange rate corroborates this. The market widely perceives the Bank of Japan's policy adjustment pace as lagging significantly behind other major global central banks.
In this context, the effectiveness of Japan's unilateral intervention is severely diminished. Analysts state that solo action can only suppress speculation and slow the decline. If US interest rate policy remains unchanged and there is no coordinated action with the United States, any yen rebound is likely to be short-lived, with the currency resuming its downtrend.
Vincent Chung, co-manager of the T. Rowe Price Diversified Income Bond Fund, indicated that the market is closely watching the 162-163 range. A break above this level would likely trigger swift intervention from Japan.
He assesses that if Japan acts alone while the US dollar remains strong, the market-supporting effect will be very limited. Historically, a strong and sustained yen rebound has required coordinated intervention involving multiple central banks, including the Federal Reserve.
Analyst Alexandre Drabowicz identified the 164-165 level as another critical intervention threshold, while cautioning that past unilateral efforts have yielded weak results. Effective currency stabilization, he argues, requires joint US-Japan action.
Weaker Yen Presents Mixed Blessings, Creating a Policy Dilemma
The yen's depreciation is not entirely negative for Japanese corporations. A weaker domestic currency boosts the value of overseas earnings when converted back to yen and benefits export-oriented sectors. This is a key reason Japan's stock market has shown resilience despite the yen's persistent weakness.
Schulz noted that domestic manufacturers continue to benefit from a weak yen. The Bank of Japan's latest quarterly Tankan business sentiment survey showed confidence among large manufacturers exceeded expectations.
However, the depreciation brings rising costs for households: increasing prices of imported goods squeeze consumer budgets and fuel broader inflation expectations.
This creates a policy balancing act for the cabinet of Sanae Takaichi. The government is attempting to stimulate investment to boost the economy while also providing subsidies to cushion the impact of rising energy and food costs on families.
Tan summarized the situation: the Japanese government desires a stronger yen but is unwilling to bear the broader economic costs associated with the tighter monetary policy needed to achieve it.
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