(June 30): The yen slid to its weakest level against the dollar since 1986, a milestone that will generate unease in Japan and put traders on high alert for authorities wading into the market.
The currency breached the 161.95 mark versus the greenback in New York trading overnight, passing the nadir it touched in July 2024 during an earlier campaign to shore up the exchange rate. It extended its decline to 162.40 in Tokyo on Tuesday, even after jawboning from Chief Cabinet Secretary Minoru Kihara. Subsequent comments from Finance Minister Satsuki Katayama had little immediate impact.
The last time the yen traded at this level it was barrelling in the opposite direction, midway through a massive and years-long rally that followed a currency accord engineered by the US. The world was a different place — Japan’s asset bubble was still forming, the Soviet Union was cleaning up after the Chernobyl nuclear disaster and Top Gun had just launched Tom Cruise towards the pinnacle of Hollywood stardom.
This time, the yen is sliding, and Japan is on its way out of an economic funk that lasted for a generation. The currency weakness is boosting the profits of exporters, and in turn helping the nation’s stock market to record highs.
But import costs are swelling, notably for oil and gas shipments priced in dollars. The ensuing inflation is hurting consumers, who are paying more for everything from food to electricity, and threatening to undermine the popularity of Prime Minister Sanae Takaichi’s government.
“Today’s focus will be whether Japanese authorities move ahead with actual intervention or stronger verbal warnings,” said Yujiro Goto, chief FX strategist at Nomura Securities.
The yen’s slump has continued in the face of regime change at the Bank of Japan, which ended a negative interest-rate policy in 2024 — a change that had raised expectations for a revival in the currency.
The BOJ lifted its benchmark interest rate on June 16 to 1%, the highest since 1995. Yet the impact was minimal, as traders expect the Federal Reserve to stay hawkish going forward. As long as the gap between Japan’s ultra-low interest rates and those in the US and other major economies remains wide, investors have an incentive to borrow cheaply in yen and invest in higher-yielding assets overseas. The resulting capital outflows keep downward pressure on the Japanese currency.
There is also concern that the Japanese government wants the BOJ to go slow on further rate hikes. The latest sign of this is news that it will call for “appropriate” monetary management in its basic policy guidelines.
The persistent softness of the yen has come in the face of a record ¥11.73 trillion (US$72.4 billion or RM290 billion) intervention by the government from April 28 to May 27 after it first slid past 160 per dollar. That bout of purchasing likely saw Japan draw on its holdings of foreign securities, including US Treasuries, to finance the currency defence, according to Finance Ministry reserve data.
The big question now is whether further intervention comes. The breach of 161.95 in New York trading on Monday has now nudged it out of its recent tight range but hasn’t yet triggered a significantly deeper run on the currency.
The huge amount spent on intervention underscores not only how much is at stake for Japan, but also the difficulty involved in pushing back against the tide in the US$9.5 trillion (RM38.53 trillion)-a-day global foreign exchange market.
The US-Israel war with Iran this year has added fresh pressure on the yen. Japan imports almost all of its energy, with the vast majority of its oil imports coming from the Middle East, making it highly exposed to disruptions in the region.
While hopes of a peace deal have taken the pressure off oil prices, the same can’t be said for the yen. The interest-rate gap and other structural factors continue to play a big role.
The ageing and shrinking population have clouded prospects for economic growth and fuelled a ballooning pile of public debt that many see as weighing on prospects for substantial rate hikes.
Japanese Finance Minister Satsuki Katayama reiterated on June 19 that authorities were ready to take “bold action” to damp excessive speculative moves in the foreign exchange market. Katayama also said that the US and Japan are increasingly “aligned” on foreign exchange policy after she spoke with US Treasury Secretary Scott Bessent, and that they agreed to take “bold steps” on currencies if needed.
Bouts of intervention in 2022, when Japan came in to support the yen for the first time since 1998, and again in 2024, helped bring temporary relief before the currency resumed its depreciation trend. In the most recent case that started on April 30, authorities entered the market several times to defend the currency.
Even as Japan seeks to put the brakes on the yen’s slide, the weak currency could land the country’s carmakers a US$5.8 billion profit windfall this year. Toyota Motor Corp estimates that every ¥1 depreciation of the yen boosts its operating profit by ¥50 billion, meaning the company stands to benefit substantially from continued yen weakness.
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