The Japanese yen experienced a sharp rise against the U.S. dollar on Friday. Reports indicated that Japanese authorities had intervened in the foreign exchange market following a prolonged period of yen weakness. After the yen continued to strengthen in early Friday trading, one strategist noted that the impact of such currency intervention tends to be limited.
On Friday, the yen surged significantly against the dollar, extending gains from the previous trading session. This movement came after Tokyo signaled its readiness to step into the market to support its currency. The yen climbed as much as 0.7% against the dollar during the day, after a substantial 3% jump on Thursday. Although it later gave back some of those gains, the currency had fully recovered all losses sustained since February 28, when conflict between the U.S. and Iran erupted.
On Thursday, Reuters reported, citing anonymous sources, that Japanese authorities had bought yen to bolster the persistently weak currency. Masato Kanda, Japan's top currency diplomat, later told reporters, "I will not comment on future actions, but Japan's Golden Week holidays have just begun." His remarks fueled further speculation about potential additional intervention.
Earlier, Finance Minister Shunichi Suzuki stated on Thursday that authorities were close to taking "decisive action" in the foreign exchange market as the yen approached a one-year low of around 160.72 against the dollar. While a weaker yen can benefit the domestic economy by making Japanese exports more competitive, it also raises the cost of imports—a significant concern amid ongoing Middle East conflict, which exacerbates Japan's core economic challenges.
Japan is a net importer of oil, relying on the Middle East for over 90% of its crude supply. With the Iran conflict now in its second month, the effective closure of the Strait of Hormuz, a critical global shipping route, has driven oil prices higher, intensifying worries about Japan's economic outlook.
Over the past year, Japan's debt burden has increased alongside rising financing costs. Prime Minister's tax cuts and spending plans have triggered a sell-off in Japanese government bonds, pushing yields higher. Since the Iran war began, sovereign bond markets globally have weakened as investors price in rising inflation and expectations of central bank tightening, with Japanese bond yields now at multi-decade highs.
Chris Iggo, Chief Investment Officer for Core Investments at AXA Investment Managers, commented on CNBC's "Squawk Box Europe" that market sentiment toward Japanese assets has shifted in recent years. "For most of my career, being long Japanese equities and short Japanese bonds was a 'carry trade,' but that logic has now reversed," he said. "Opportunities in technology, industry, and robotics make Japanese equities worth a long position, but the macro environment points to higher interest rates. The yen's depreciation essentially reflects declining market confidence in the Bank of Japan."
The Bank of Japan held its benchmark interest rate steady on Monday but raised its inflation forecast from 1.9% to 2.8% and halved its 2026 economic growth projection to 0.5%. Iggo added, "After the war began, the Bank of Japan slowed its pace of tightening, which is precisely what worries the bond market and weighs on the yen."
Steve Englander, Head of Global G10 FX Research and North America Macro Strategy at Standard Chartered, suggested on the same program that Japanese authorities might be "feeling pressure from the U.S. to exercise restraint in currency intervention." Last year, the U.S. Treasury placed Japan and eight other economies on a "Monitoring List," citing the need for close attention to their currency practices and macroeconomic policies. This followed a statement from former President Donald Trump in April that his administration was factoring "currency manipulation and trade barriers" into calculations for so-called reciprocal tariffs.
However, Englander argued that the continued depreciation of the yen, which worsens domestic price conditions, has pushed authorities to their limit. "Further yen weakness does more harm than good, particularly by amplifying the impact of rising oil prices and eroding domestic purchasing power," he explained. He noted that rising government bond yields occurring alongside a falling yen is "a very bad signal for market confidence."
"With oil prices, U.S. pressure, and the limited effectiveness of intervention, multiple factors are converging, forcing Japan to act," he said. "Japanese exports should be booming, but they are actually weak; the yen falling to 160 is fundamentally a sign of insufficient economic momentum." Englander added that markets widely expect Japan to intervene again in the currency market. "The scale of intervention is unclear, but action has been taken; official warnings afterward signal that further intervention is possible, and the options market is pricing this in."
In a morning note on Friday, Jordan Rochester, Head of FX Strategy for EMEA at Mizuho Bank, also suggested that another round of intervention could be imminent. "The risk has not been eliminated," he said. "Japan has been hinting at intervention for months, finally acted after confirming it to reporters yesterday, and clearly stated it may do so again." However, Rochester questioned whether forex intervention can truly protect the Japanese economy. "In the long term, as long as the war/blockade continues and oil prices remain high, the yen will stay under pressure," he said. "Currency intervention addresses the symptoms, not the root cause. For it to be truly effective, it would need to be accompanied by favorable conditions like lower oil prices and declining global interest rates."
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