The yen has hit a milestone few in Japan will welcome: its weakest level against the dollar in 40 years. The currency fell to around 162 per dollar, a low not seen since 1986, CNBC reported, reviving expectations that the government may step in to support it.
A widening gap
At the heart of the yen's long decline is the gap between interest rates in Japan and those elsewhere. The Bank of Japan has only cautiously moved away from years of ultra-loose policy, lifting its benchmark rate to 1% earlier this month — the highest since 1995, but still far below the levels prevailing in the United States and Europe. That difference rewards investors who borrow cheaply in yen to buy higher-yielding assets abroad, a long-running trade that keeps money flowing out of the currency and holds it down.
The intervention question
Japanese authorities have shown they are willing to fight the trend, with limited success. Between late April and May, the finance ministry and central bank mounted a record intervention — spending on the order of ¥11.7 trillion (around $73 billion) to buy yen — which pushed the currency briefly back toward 155 before it resumed its fall. Finance Minister Satsuki Katayama said the government stood ready to take "appropriate action" against what officials call excessive, one-sided moves, the kind of verbal warning that often precedes — but does not guarantee — direct intervention.
Winners and losers
A weak yen cuts both ways. It is a boon for Japan's big exporters, making their cars and electronics cheaper abroad and flattering their overseas earnings, and it has helped power a record-breaking inflow of foreign tourists drawn by a country that suddenly feels cheap. But for ordinary households, the weak currency bites: Japan imports much of its energy and food, priced in dollars, so a falling yen pushes up the cost of fuel, electricity and groceries, feeding the very inflation the country spent decades trying to summon — now in a less welcome form.
A tight corner
The episode underscores the bind facing the Bank of Japan. Raising rates more aggressively would, in theory, support the yen, but it risks choking off a domestic recovery that remains fragile. Holding steady, on the other hand, leaves the currency exposed to further falls. Much may ultimately depend on the United States: should the Federal Reserve cut its own rates faster than expected, the gap that has punished the yen would narrow on its own. Until then, Tokyo is left watching the screens — and weighing how much further it is prepared to let the yen fall before it acts. None of this is investment advice.
