Yen hits 40-year low: Geopolitics, rate hikes, and Trump’s pressure push Japan into a policy corner—has $74 billion of intervention gone to waste?

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Japan deployed a record scale of foreign exchange reserves to intervene in the currency market, yet failed to prevent the yen from falling to its lowest point in nearly 40 years. Facing multiple pressures—including surging oil prices driven by geopolitical conflict, a reversal in US interest rate expectations, domestic political pressure, and trade pressure from Trump—Japan’s monetary authorities are now confronted with an almost impossible policy dilemma.

On June 30, the yen-to-dollar exchange rate broke below 162, hitting its lowest level since 1986. Earlier, the Japanese Ministry of Finance spent nearly $74 billion in April alone to buy yen, setting a record for single-month intervention, which triggered a brief sharp rebound in the exchange rate. However, this effect lasted only a few weeks, and by early June the rate had returned to around 160 yen per dollar, then further broke down. Finance Minister Shunichi Katayama then reiterated that the authorities are “ready at any time to take appropriate action when necessary.”

Faced with foreign exchange reserves still as high as $1.09 trillion as of the end of May, the market now doubts not whether Japan has the ability to intervene further, but how much significance intervention still holds. NLI Research Institute Chief Economist Tsuyoshi Ueno bluntly stated: “The market is clearly aware that the government has almost no tools left that can reverse the decline in a decisive way—I believe this is one of the main reasons for the yen’s continued weakness.”

Interest Rate Spread Dominance: The Structural Roots of the Yen’s Weakness

The core logic behind the yen’s long-term weakness lies in the persistent, wide interest rate gap between Japan and the US and other major economies. The ultra-low interest rate environment has fueled large-scale carry trades—investors borrow yen at low cost, then allocate to high-yield overseas assets, causing continuous capital outflow, and imposing systemic pressure on the yen.

Although the Bank of Japan (BOJ) raised its benchmark rate in June to the highest level in 31 years, it remains extremely low by international standards. Notably, since the BOJ exited its negative interest rate policy in March 2024, the policy interest rate gap between Japan and the US has been halved, yet the yen has not stabilized—in fact, it has continued to weaken, illustrating that simply tightening monetary policy is unlikely to fundamentally reverse the trend.

At the same time, Japan’s heavy fiscal burden further erodes market confidence. The size of Japanese government debt exceeds 200% of GDP—the highest among major economies—and persistent fiscal deficits have prompted questions about the Japanese government’s fiscal sustainability, thereby reducing the appeal of Japanese assets and the yen.

Geopolitical Shocks: Middle East Conflict Fuels Imported Inflation

Military conflict involving the US, Israel, and Iran has introduced additional uncertainty for the yen. Japan is almost entirely dependent on imported energy; more than 95% of its oil imports come from the Middle East, making it extremely sensitive to supply disruptions in the region. Rising oil prices mean Japan must pay a higher dollar bill for energy imports, directly increasing demand for foreign exchange, and putting further downward pressure on the yen.

The global inflation surge set off by the conflict has also hit the yen from another angle. Market expectations for the direction of US interest rates have shifted from rate cuts to hikes, greatly increasing the appeal of dollar-denominated assets, subjecting the yen to more selling pressure. For an economy highly reliant on imported energy and raw materials, the weak yen and imported inflation form a vicious cycle that leaves policymakers in a bind.

The Dilemma of Intervention: Short-term Effectiveness, Long-term Weakness

Historically, Japanese market intervention has an immediate impact—the yen typically rises about two yen against the dollar within seconds, and by 4 to 5 yen within several hours. However, if economic fundamentals favoring a weaker exchange rate do not change simultaneously, the intervention’s effect quickly dissipates.

The late-April intervention vividly demonstrated this limitation. The authorities’ actions caused a rapid rebound in the yen, but the gains soon faded, and by early June the exchange rate fell back to around 160 per dollar—by the end of the month, it had dropped further to 162.40, a 40-year low.

Operationally, the Ministry of Finance makes the decisions, while the BOJ executes through a few commercial banks, usually funding the intervention from the cash or US Treasury holdings within foreign exchange reserves. According to Bloomberg, there are signs that the latest April intervention included the use of foreign securities, including US Treasuries. To maximize uncertainty, officials typically do not confirm intervention actions immediately, but disclose intervention amounts at the end of each month to unsettle the market and deter speculators.

However, repeated intervention carries political and diplomatic risks. Frequent unilateral actions could invite accusations of “currency manipulation,” disrupt corporate pricing, payments, and hedging activities, while causing significant losses for traders betting on continued yen depreciation.

Pincer Pressure: Sanae Takaichi’s Policy Space Is Extremely Limited

The ongoing depreciation of the yen has become a serious domestic political issue. For Japan’s economy—with its heavy dependence on imported energy and raw materials—a weak yen pushes up household living costs and squeezes the margins of domestically focused companies. The resulting cost-of-living crisis previously led to the resignation of Sanae Takaichi’s two predecessors as prime minister. Upon taking office, Takaichi released a strategic plan in June focusing on encouraging private investment in key sectors such as AI, semiconductors, defense, and shipbuilding, aiming to boost Japan’s economic growth rate.

External pressure is equally significant. Trump has long accused Japan of deliberately weakening the yen to gain a trade advantage, and last March threatened to impose higher tariffs. Japan remains on the US Treasury’s exchange rate “monitoring list.” Although the US and Japan issued a joint statement in September clarifying that intervention should be reserved for “excessive volatility or disorderly market movements” rather than for competitive advantage, this framework has in effect greatly narrowed Japan’s policy options.

US Treasury Secretary Bessent recently expressed her preferred solution—suggesting the BOJ should be allowed to raise rates independently, allowing the yen to return to fair value. This position both pressures Japanese monetary policy and further limits Tokyo’s room for unilateral intervention to support the yen diplomatically.

Way Out: Structural Adjustment Remains the Only Solution

Beyond direct intervention, Japan could theoretically support the yen fundamentally by encouraging corporate capital repatriation, expanding domestic investment, or deepening fiscal consolidation. Stronger domestic investment would increase demand for yen assets, while reducing government debt and restoring fiscal credibility would help improve the long-term appeal of Japanese assets.

However, these measures all take time to yield results. Under the current confluence of pressures, Japanese monetary authorities face this reality: the fastest tool at hand—direct intervention—has been proven to offer only short-lived relief; while the structural policies that could fundamentally change the situation are slow to materialize. As Tsuyoshi Ueno observed, the market is well aware of this, which is precisely why the yen’s decline is so difficult to contain.

Risk Warning and DisclaimerThe market carries risks; investments require caution. This article does not constitute personal investment advice and does not take into account the individual investment goals, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article suit their own circumstances. Investing accordingly is at your own risk. ```