Devaluation of the Japanese yen reaches a 40-year low against the dollar, with the possibility of intervention

Japan’s currency, the yen, hit a new record low as it traded at around 162.4 per dollar in Asian trade on Tuesday. This is the lowest value recorded for the currency since 1986.

This move prolongs a period of weakness for the yen, which has shown continued weakening despite the Bank of Japan’s efforts to stabilize it. The situation intensifies speculation about possible direct intervention by Japanese authorities in the foreign exchange market.

Given the scenario, Japan’s Finance Minister, Satsuki Katayama, spoke out, ensuring that the government is prepared to adopt “adequate” and “decisive” measures against excessive currency fluctuations. She confirmed that the intervention option was discussed with Washington and remains a possibility.

In the market, traders are closely monitoring any indication that Tokyo may start selling US dollars to strengthen the yen, a type of action that already occurred during the spring.

The main cause of this instability is the significant difference between interest rates in Japan and the United States.

Even with the Bank of Japan raising its key rate to 1% in mid-June, the highest level since 1995, Japanese yields remain considerably below American yields. US Treasury bonds maturing in ten years, for example, offer around 4.5% return, while Japanese bonds are around 2.6%.

This sharp difference in interest rates encourages the so-called “carry trade” operation, where investors seek financing in yen at a low cost to invest in assets that offer higher yields in other markets, notably in the USA. By converting yen into dollars to make these investments, they exert constant selling pressure on the Japanese currency, directly contributing to its continued devaluation.

Furthermore, the appreciation of the US dollar has added pressure on the yen.

The U.S. currency has benefited from being considered a safe haven, especially with geopolitical tensions surrounding Iran. Expectations that the Federal Reserve may raise interest rates later this year, in contrast to the Bank of Japan’s caution, have further widened the gap between the economies.

Japan’s heavy dependence on energy imports, which have become more expensive with high oil prices, also intensifies demand for dollars.

Japanese authorities assess challenges after further currency fall

The yen’s latest devaluation represents a major challenge for economic policymakers, who have already deployed substantial resources to try to stem the decline.

Between the months of April and May, Japan invested a record 11.7 trillion yen (equivalent to 63.3 billion euros) in interventions in the foreign exchange market. Despite this, which was the greatest effort ever recorded, the Japanese yen continued on its path of weakening.

Domestic policies also contribute to the complex scenario, with Prime Minister Sanae Takaichi’s agenda, focused on high spending and growth, raising questions about the country’s budgetary discipline.

Analysts indicate a high risk of intervention in the short term, given that speculative bets against the Japanese yen have reached multi-year highs. This new record low in four decades tends to amplify political apprehension in Tokyo.

However, many doubt that purchasing the currency will be able to reverse the devaluation trend for an extended period, as the disparity in interest rates remains significantly unfavorable to the yen.

The Bank of Japan’s next monetary policy deliberation, scheduled for July 31, is being closely monitored. It is expected that further rate hikes will be the most effective strategy to stop the currency’s devaluation.

At this time, the Japanese yen remains influenced by forces that its central bank has had difficulty controlling.