Karishma Vanjani
Politics have helped dragged the Japanese yen to its lowest in two weeks, but investors shouldn't count on that continuing. Tokyo has a $2.2 trillion backstop for its currency.
The yen fell 0.25% against the dollar on Wednesday, following a 0.79% decline on Tuesday. That put the dollar at Yen156.73, the highest since Feb. 6.
A weaker yen makes Japanese goods, such as cars and tech, cheap in the U.S., while making U.S. exports more expensive in Japan. That combination is sure to upset some people in the White House.
Blame Prime Minister Sanae Takaichi's tightening grip on the Bank of Japan. Her government recently nominated two board members whom the market believes favor low interest rates, and the Mainichi Shimbun, one of Japan's biggest newspapers, wrote on Tuesday that Takaichi personally warned BOJ Gov. Kazuo Ueda against further rate hikes. The lower rates are expected to be, the weaker the yen.
"The big question: How far will the new, stimulus-oriented Japanese administration go to bend the BoJ to its will?," economist and former Pimco CEO Mohamed El-Erian wrote on X.
The yen is also under pressure from escalating tensions with China, which recently banned critical exports to Japan.
But there are plenty of reasons why the yen could make a comeback.
Japan's Ministry of Finance has reported that Japanese companies, the government, and others held $2.24 trillion in international equities among other foreign assets as of the end of 2024. "Any repatriation of that could drive considerable yen strength " wrote Deutsche Bank macro strategist Tim Baker in a note.
What could tempt Japanese companies to bring money back home is this year's spectacular gains in Japanese stocks. The Nikkei Stock Average closed up 2.2% at a record high on Wednesday, bringing its gain to 16% so far this year. The S&P 500 is up 1.5% in 2026.
"This performance is yet to entice Japanese investors -- they've in fact been big sellers of local equities over the past two years," Baker wrote. But "a recognition of Japan's better performance [over global equities] may alter this story at some point."
Other factors that could support a falling yen include higher Japanese growth and potentially less political pressure on the Bank of Japan's governor now that the board-member nominations are done. Citi believes the yen can strengthen to below Yen145 to the dollar by year-end as political pressure fades.
Responding to concern that a more dovish central bank committee would fuel inflation by keeping rates too low, yields on long-duration Japanese bonds rose on Wednesday. Yields on 30-year and 40-year debt rose by four basis points each. A basis point is a hundredth of a percentage point.
No government wants its bond yields too high because that means it has to pay more money in interest to investors buying the debt they issue. Rising yields could put pressure on the BOJ to allay worry about inflation by lifting interest rates, which would tend to push up the yen.
"Bottom line, either the BoJ is going to hike rates to calm inflation and the yen weakness or the longer end of their yield curve is going to do it for them," wrote Peter Boockvar, chief investment officer at One Point BFG Wealth Partners.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
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(END) Dow Jones Newswires
February 25, 2026 16:33 ET (21:33 GMT)
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