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 depreciated as much as 0.2 per cent to touch 161.98 versus the greenback in New York trading on Monday, breaching the 161.95 mark touched in July 2024 during an earlier campaign by Japan to shore up the exchange rate.
Structural issues cloud Japan's economic prospects
Structural issues such as the aging and shrinking population have clouded Japan's prospects for economic growth. 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 one per cent, the highest since 1995. Yet the impact was minimal, as traders expect the Federal Reserve to stay hawkish going forward.
Impact on exporters and consumers
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.
Intervention concerns and interest rate differentials
“Intervention is right around the corner if we don’t see a quick correction,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc. Still, intervention is “only a temporary fix if they do not address the interest-rate differential.” The persistent softness of the yen also came in the face of a record ¥11.73 trillion (US$72.5 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 U.S. Treasuries, to finance the currency defence, according to Finance Ministry reserve data.
Historical context and future outlook
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 United States. 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 toward the pinnacle of Hollywood stardom. The Japanese government is also expected to call for “appropriate” monetary management in its basic policy guidelines, in an apparent bid to dissuade the central bank from further interest rate hikes. “Doubtless, the Bank of Japan is watching things closely,” Shaun Osborne, Scotiabank's head of currency strategy, said after the yen crept past the key level on Monday.
