TEMPO.CO, Jakarta - The Japanese yen has fallen to its weakest level against the US dollar in nearly 40 years, fueling expectations that Japan may intervene again to support its currency—a move that could ripple through global financial markets, including US Treasury bonds and Wall Street.
According to CNN, the yen was trading around 162.7 per US dollar early Wednesday, its lowest level since 1986, as investors continued favoring the greenback amid a wide interest-rate gap between the United States and Japan.
The currency's prolonged decline has intensified speculation that Japanese authorities could step into the foreign exchange market for a second time this year.
Japan's Finance Minister Satsuki Katayama reiterated Tuesday that the government stood ready to respond to excessive currency volatility.
Authorities would take "appropriate action" whenever necessary, she said.
The yen's latest slide has been driven largely by shifting expectations for US monetary policy. Investors increasingly believe the US Federal Reserve will keep interest rates elevated—or even raise them further—to contain inflation fueled by higher energy prices following the conflict involving the United States, Israel, and Iran.
The stronger outlook for US interest rates has boosted the dollar while putting additional pressure on the yen. Although the Bank of Japan (BOJ) raised its benchmark interest rate to 1 percent in June—the highest level in decades—it remains far below the Fed's current policy rate of 3.5 to 3.75 percent, encouraging investors to shift capital into higher-yielding dollar assets.
The Supreme Court's recent decision preventing President Donald Trump from dismissing Federal Reserve Governor Lisa Cook without cause has also reinforced confidence in the Fed's independence, further supporting the US dollar.
Japan's weakening currency presents growing challenges for its domestic economy. Because the country imports much of its food and energy, a weaker yen raises import costs and worsens inflation pressures, particularly as oil prices remain elevated.
Analysts say the currency's depreciation has become an increasingly sensitive political issue as households continue facing a higher cost of living.
To stabilize the yen, Japan could once again intervene by selling US dollars and purchasing its own currency. Such operations are typically financed by liquidating part of Japan's foreign exchange reserves, which include one of the world's largest holdings of US Treasury securities.
As reported by Business Insider, Japan remains the largest foreign holder of US government bonds, making any large-scale intervention closely watched by global investors.
Data from Japan's Ministry of Finance showed the country's holdings of foreign securities declined by roughly US$75 billion in May, a move analysts believe reflected Treasury sales used to finance previous currency support operations.
Chris Turner, global head of markets at ING, said any future intervention could coincide with potentially dollar-supportive events such as remarks from Federal Reserve Chair Kevin Warsh and the release of US employment data, with the US Independence Day holiday potentially providing a quieter window for intervention.
Nigel Green, chief executive of financial advisory firm deVere Group, said investors should focus not only on whether Japan intervenes, but also on how the government finances those operations.
"If authorities are compelled to step up support for the yen over a prolonged period, global investors could suddenly find themselves confronting an entirely different risk: one of the world's largest foreign holders of US Treasuries becoming a more significant seller," Green said.
Despite those concerns, analysts believe the direct impact on the US bond market would likely remain limited because of the enormous size of the Treasury market.
Karl Schamotta, chief market strategist at Corpay, noted that previous Japanese interventions involved sales worth tens of billions of dollars, relatively small compared with the roughly US$29 trillion market for US government debt.
However, larger coordinated intervention could have broader financial consequences.
One of the biggest risks involves the so-called carry trade, in which investors borrow cheaply in yen and invest in higher-yielding assets such as US stocks.
If the yen suddenly strengthens following government intervention while Japanese interest rates continue rising, borrowing costs would increase, potentially forcing investors to unwind those positions by selling equities.
A similar unwinding after the BOJ unexpectedly raised interest rates in mid-2024 triggered sharp declines across global stock markets, particularly technology shares.
The latest weakness in the yen therefore reflects not only Japan's domestic economic challenges but also the increasingly interconnected nature of global financial markets, where currency movements can quickly influence bonds, equities, and international investment flows.
Read: Japan, US Announce Close Coordination to Stabilize Yen
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