Yen plunges to a 39-year low of 162/dollar as wide US-Japan rate gaps fuel carry trades, with Tokyo signaling possible intervention.
The Japanese yen slipped into the 162-per-dollar range in Tokyo trading on Tuesday, the weakest the currency has been in nearly four decades, extending a slide that has accelerated sharply over the past few months. The yen weakened to as low as 162.36 against the dollar before steadying slightly. The currency broke 161.96 to the dollar overnight, touching levels not seen since December 1986, after briefly testing 161.97 in New York on Monday before breaking through 162 as the Tokyo session opened.
Here is what is driving the move and what it means going forward.
Slow, sustained slide
This is not a sudden one-day shock. The yen was expected to fall nearly 2% against the dollar for the second quarter alone, its fourth consecutive quarter of losses, following a seven-quarter losing streak in 2022. For about a week, Japan’s currency has been teetering on the edge of four-decade lows and repeatedly testing them, sitting well within the range where analysts expect government intervention.
Interest rate gap
The yen’s broader weakness is driven by the large interest-rate and real-yield spreads between Japan and the US, which remain positive for carry trades, where investors borrow cheaply in yen and invest in higher-yielding assets elsewhere, putting sustained downward pressure on the Japanese currency.
This is despite the Bank of Japan’s more aggressive than expected move. The BOJ recently hiked its policy rate to 1%, the highest in over three decades, in its ongoing monetary policy normalisation process started in 2024. The quarter-point move was the first rate rise since December, when the central bank raised rates to 0.75%, to the highest level since 1995. The shift was made as Japan faced inflationary pressures, which were partly due to the higher energy prices during the Iran conflict. Even with rates at a three-decade high, the gap with US rates remains wide enough to keep ‘carry’ trade flows working against the yen.
Tokyo has already intervened once this year
Markets are on alert because Japan has shown it is willing to act. On April 30, the yen appreciated sharply to 156.6 against the dollar from 160.39, prompting speculation that Tokyo had stepped into the market. The currency appreciated to around 155 the following day before resuming its decline. Between April and May, Japan deployed over 11.7 trillion yen, approximately $72.8 billion, in foreign reserves to prop up the currency.
Finance Minister Satsuki Katayama has repeatedly warned that the government stands ready to take “decisive action.” Japan’s Finance Minister said on Tuesday the government was ready to take appropriate action against excessive currency moves. Yet the effectiveness of these interventions has been questioned. The market remains sceptical about the effectiveness of government efforts to prop up the yen, and pressure on the currency has been steady. While any intervention is expected to lift the yen to some extent in the short term, some investors are betting it will be difficult to stop the currency from weakening, with concerns largely centred around fiscal and monetary policy.
Analysts see intervention as a matter of “When” – not “If”
Carol Kong, currency strategist at Commonwealth Bank of Australia, said: “It’s a question of when, not if, the Ministry of Finance intervenes again to support the yen.”
But the timing is tied closely to upcoming US data. An economist noted that Japan swung into action after a soft US inflation report in July 2024, and suggested that if upcoming US data throws a surprise gift for Federal Reserve doves this week, the Ministry of Finance could burst into action with momentum from a weaker US dollar on its side. Until then, the warnings are likely just talk.
Currency strategist Wang noted that intervention should not depend on a particular level, but rather on the nature of the currency move. She characterised the current move past 162 as a new cycle high, likely sensitive enough to reignite anxiety around currency weakness domestically, though she does not believe intervention alone would derail the broader market trend, given that wide rate differentials continue to favour carry trades.
Japanese stocks benefit even as the currency slides
A weak yen is not bad news for everyone. The Nikkei 225 rose 1.64% to 70,607.50 on Tuesday, with the weakening currency making the earnings potential of export-oriented companies more attractive. Semiconductor and export stocks led gains, while improving sentiment around the Strait of Hormuz also helped lower fears of disruption to energy supply. Exporters such as Mitsui & Co and Hitachi were among the names benefiting from the currency’s slide, while importers and consumer-facing companies face the opposite pressure from higher input costs.
What to watch next
The US payrolls report due Thursday is the next major catalyst, expected to show employers added 110,000 jobs last month, with unemployment holding steady at 4.3%. That information will influence near-term Fed rate expectations and, therefore, the ongoing dollar rally (and yen sell-off) may have more legs to stand on. Markets are also closely monitoring the precarious talks between Iranian and US negotiators in Doha, which were tested during the weekend by missile firing by both sides in the Middle East war that has lasted for four months.
For now, the yen sits at its weakest point since 1986, with Tokyo’s patience — and its reserves — being tested in equal measure.
