Yen weakens to near 38-year low as odds of another government intervention rise

The yen has fallen to its lowest level against the US dollar in nearly 38 years, boosting the likelihood that Japan's government will launch its second intervention in less than two months to prop up the currency as its weakness further erodes the nation's economy.

The yen settled above 160 per US dollar on June 26, its highest rate since December 1986. The dollar has rallied nearly 14% against the yen since the start of 2024 as the Federal Reserve has held its benchmark interest rate above 5% since July 2023 and the Bank of Japan (BoJ) has kept its rates near zero. In March, the BoJ ended about eight years of negative interest rates but kept its target between 0% and 0.1%.

"The yen's ongoing weakness goes down to the BoJ's rock-bottom interest rates," Matthew Weller, global head of research at FOREX.com and City Index, said in an interview. "Traders are increasingly concerned that the BoJ may have missed its window to raise interest rates while inflation was notably above the BoJ's target, leaving the country stuck with the lowest interest rate among the major developed economies once again."

As the dollar rallied against the yen this spring, Japan spent $62 billion to support its currency. The BoJ will likely do a similar intervention if yen weakness persists in the near term, but such a move will provide little more than a short-term spike, Weller said.

"Like the past few instances of unilateral intervention, that move could be quickly reversed as long as the underlying fundamental story doesn't change," Weller said.

Yen likely to remain weak

Intervention may slow but will not reverse the uptrend in the dollar against the yen since the BoJ is unlikely to significantly boost rates as the country's inflation growth is slowing and the Fed appears to be in no rush to loosen policy, according to Elias Haddad, a senior markets strategist with Brown Brothers Harriman.

"Until the BoJ outlines a more hawkish tightening cycle the yen is likely to remain weak," Haddad said in an interview.

Since the start of the year, the yen has lost ground to all its G10 currency peers, a trend unlikely to reverse even as central banks begin cutting rates this year.

"The yen is weak because the Bank of Japan has painted itself into a corner," Eugene Epstein, head of trading and structured products for North America at Moneycorp, said in an interview. "Their policy rate is practically 0%, far behind their peers. On interest rate differentials alone that is a recipe for currency weakness."

The yen will likely get weaker unless the BoJ significantly alters its monetary policy, through higher rates and a cut to purchases and holdings of domestic assets, or chooses to sell a significant amount of dollar reserves and buy yen. Neither option looks likely in the near term, according to Epstein.

"The BoJ has been trying to stimulate the economy with little success and now that the rest of the world is in a higher interest rate environment, they are forced to pick their poison: maintain low rates and accept a weak yen or raise rates and potentially restrict economic growth, which is already poor," Epstein said.

Still, the BoJ could surprise markets in July with rate hikes and quantitative tightening to arrest yen weakness and avoid tariff threats as the US presidential election nears in November, said Mark McCormick, global head of foreign exchange and emerging markets strategy at TD Securities.

The US Treasury Department in June added Japan to the list of trading partners it is monitoring for potential currency manipulation.

For now, the weak yen will continue to create a cost of living shock in Japan even as nominal wages are on the rise, according to McCormick. It will also have largely political consequences as a weak yen typically corresponds with very poor approval ratings for the National Diet, Japan's legislature, McCormick said.