The yen breaks below its 40-year bottom line; this year's trillions of yen in intervention gains have been completely wiped out, and Tokyo is deeply mired in a policy deadlock.

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Since the intervention at the end of April, the yen has continued to fall over the past two months, pushing the Japanese government into an almost insoluble policy predicament.

On Monday, June 29, during early U.S. stock trading hours, the yen-dollar exchange rate dropped to its lowest point since 1986, with the dollar-yen rate rising to 161.97, breaking the critical threshold of 161.95. 161.95 was precisely the entry point for the Japanese government’s intervention in the foreign exchange market in July 2024.

To curb the unilateral depreciation of the yen, the Japanese Ministry of Finance conducted record-scale foreign exchange interventions in about one month at the end of May this year, investing a total of 11.73 trillion yen. By this Monday, the approximately $72.5 billion spent by the Japanese government this year to support the exchange rate had been completely undone by the market.

A little over a week ago, after the dollar-yen rate surged beyond 161.00, Japan’s Finance Minister Satsuki Katayama reiterated on June 19 that the government is ready to take “bold action” at any time to curb excessive speculative volatility. She also said that after an online meeting with U.S. Treasury Secretary Bessent, the two countries had become increasingly “aligned” in their stance on exchange rate policy, and if necessary, would jointly take “bold measures.”

However, the verbal statements from Japanese officials have failed to provide effective support for the exchange rate. The market’s lukewarm reaction reflects deeper structural contradictions: on one hand, imported inflation continues to erode consumer purchasing power, forcing the government to stabilize the exchange rate; on the other hand, it is believed that the Japanese government is pressuring the Bank of Japan to refrain from further rate hikes, and it is precisely this gradual and restrained monetary policy that keeps the U.S.-Japan interest rate differential high, fundamentally suppressing the yen. Thus, the policy dilemma in Tokyo is revealed.

The Intervention Result of 11.73 Trillion Yen is Wiped Out, Yen Nears Historic Barrier Again

From April 28 to May 27 this year, after the yen first broke below the 160 threshold, the Japanese Ministry of Finance immediately launched unprecedented-scale foreign exchange interventions, accumulating purchases of 11.73 trillion yen. The intervention effect was once immediate—the yen rebounded quickly against the dollar to around 155.

However, in just about a month, all the gains were reversed, the yen fell below the 160 threshold again, and on Monday further broke through the 2024 intervention low of 161.95, hitting a nearly 40-year new low.

Looking back in history, this situation is yet another epitome of repeated defeats and renewed battles with foreign exchange interventions by the Japanese government. Media pointed out that Japan resumed interventions in 2022 after more than twenty years, intervened again in 2024, each time bringing only brief respite, followed by continued depreciation. Behind the huge intervention costs, the Japanese government used its holdings of foreign securities—including U.S. Treasuries—to finance interventions, which could even trigger ripple effects in U.S. and global bond markets.

Monex Inc. foreign exchange trader Andrew Hazlett said that if the yen exchange rate does not correct quickly, "intervention is imminent." But he also frankly stated that intervention "is just a temporary patch, the root problem is the unaddressed interest rate differential."

U.S.-Japan Interest Rate Differential Dominates the Trend, Carry Trading Creates Continuous Selling Pressure

The core logic suppressing the yen has always been the huge interest rate gap between the U.S. and Japan. The Fed’s target range for the federal funds rate currently remains at 3.50% to 3.75%, and the new Fed Chair Walsh sent a more hawkish policy signal after this month’s monetary policy meeting, leading the market to further raise expectations for rate hikes this year.

Meanwhile, the Bank of Japan announced a 25 basis point rate hike to 1% on June 16 this month, marking the highest rate since 1995. However, analysts believe this magnitude is insufficient to shake the interest rate gap between the two countries.

According to reports, LMAX Group analysts point out that this Bank of Japan rate hike “cannot offset the still massive U.S.-Japan interest rate gap, especially as the Fed maintains a hawkish stance, implying rates will stay elevated for a long time.”

The interest rate differential provides fertile ground for carry trade: investors borrow low-cost yen, convert it into dollars, and allocate it to high-yielding dollar assets, creating persistent selling pressure on the yen. Under this mechanism, even the Bank of Japan’s rate hike moves have almost negligible effect on supporting the yen’s exchange rate.

Bloomberg macro strategist Brendan Fagan bluntly said: “Without official action, the structural depreciation of the yen has no reason to halt on its own. Japan must intervene again, or the direction of U.S. real interest rates needs to change substantially.”

Deep Contradiction Between Government and Central Bank

The policy dilemma faced by the Japanese government now goes far beyond the exchange rate itself. Continued yen depreciation pushes up import costs, causing widespread increases in energy and food prices, eroding consumer purchasing power, and threatening the public support for the cabinet of Prime Minister Sanae Takashi. This pressure should motivate the government to support the central bank in raising rates to support the yen.

However, reports say the Japanese government is expected to call for the central bank to exercise “appropriate” monetary management in its basic policy guidelines, which is generally interpreted as a signal to discourage further hikes by the central bank. Behind this approach lie fiscal realities: the Japanese government’s debt-to-GDP ratio is the highest among developed countries, and if policy rates rise rapidly, it will sharply increase national financing costs, creating a significant fiscal burden.

Hawkish voices within the Bank of Japan have recently risen, with policy board member Naoki Tamura calling for rate hikes every few months, gradually pushing the policy rate toward a neutral level of 2%. Nevertheless, the market generally expects that the Bank of Japan will stick to a gradual rate hike path, with the next increase unlikely until year-end or later. Thus, the tension between stabilizing the exchange rate and stabilizing fiscal policy creates the deeper roots of Tokyo’s policy dilemma.

Intervention Outlook: Limited Window, Effectiveness in Doubt

Against this backdrop, the market remains highly vigilant about another round of Japanese government intervention. This month’s online talks between Satsuki Katayama and Bessent, as well as their statements about taking "bold measures" if necessary, are interpreted by the market as providing some political backing. But analysts are cautious about the effectiveness of interventions.

Shaun Osborne, head of FX strategy at Scotiabank, said the Bank of Japan is undoubtedly closely watching the situation. But observers generally note that pure FX intervention only brings short-term breathing space and cannot change the structural trend driven by the interest rate differential.

According to analyst Zhang Meng, quoted by Shanghai Securities News, based on IMF regulations on free-floating exchange rate regimes, the frequency and scale of intervention are subject to certain constraints; moreover, implementation often requires selling U.S. Treasuries first, and the financing process itself could trigger global bond market volatility, so authorities act with considerable caution. Her judgment is that one should first observe whether intervention will be triggered near the 162 level; absent intervention, the next key point will be 165.

Additional analysis finds that the optimal window for intervention is often when the exchange rate is at an "even more undervalued" state—in other words, the deeper the fall, the higher the cost-effectiveness of intervention. And before the U.S.-Japan rate gap loosens substantially, even if intervention successfully sparks a technical rebound in the yen, at most it will be a brief fix at the trading level, making it difficult to confirm a trend reversal.

As Andrew Hazlett says, intervening without solving the interest rate differential is merely trading time for space—the next test will inevitably come.

Risk Warning and DisclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice, nor does it consider the individual investment goals, financial situation, or needs of specific users. Users should consider whether any opinions, views, or conclusions herein suit their particular situation. Investing accordingly is at your own risk. ```