Japan's yen hits 40-year low. Here's why it matters
What's the story
The Japanese yen has hit a 40-year low, falling to its weakest level against the US dollar in 40 years. The decline is mainly due to changing expectations around US interest rates and a stronger dollar. Earlier this year, the Japanese government intervened to stabilize the yen but was unsuccessful in stopping its downward trend. Investors are now anticipating another intervention attempt as the currency hits new multi-decade lows.
Market dynamics
Dollar gains on Fed bets
Traders are betting on the US Federal Reserve holding or even raising rates in the coming months to tackle inflation from the US-Israeli war with Iran. This shift has strengthened the dollar, putting pressure on other currencies like the yen. The US dollar index is up 3% this year after a 9% fall in 2025.
Economic impact
BOJ lifts rate to 1%
The Bank of Japan (BOJ) raised its benchmark interest rate to 1% on June 16, the highest since the 1990s. However, this is still much lower than the Fed's rate, which was held steady at a range of 3.5% to 3.75% in June. This difference in rates is driving investors toward higher returns in the US and away from Japan, further weakening the yen and increasing volatility across global markets.
Economic crisis
Japan's rates still lower than peers
Japan had near-zero to negative interest rates in the 2000s and 2010s to stimulate its economy and avoid deflation after a severe recession in the 1990s. However, despite BOJ starting to raise interest rates in 2024 as inflation exceeded its target of 2%, the yen continues to fall. This is because Japan's interest rates are still lower than those of other countries, risking an economic crisis amid stubborn inflation.
Inflation concerns
Weak yen threatens Japan's import costs
A weak yen is threatening to worsen import costs and the cost of living crisis in Japan. This has been a major concern for voters, as the country imports most of its food and energy. Chris Turner, global head of markets at ING, noted that "Japanese officials have made it clear that the weak yen poses a threat to import costs and Japan's cost of living crisis, which has been a key topic for the electorate."
Market influence
Japanese intervention possible this weekend
The Japanese government could intervene by selling US dollars or dollar-denominated assets like US Treasuries and buying yen. Such an intervention could come as soon as this weekend, according to Turner. A rise in the yen could affect financial markets by putting pressure on the dollar and Treasuries. However, analysts say the overall impact would be modest due to the size of the US bond market.