Currency nears four decade lows
The Japanese yen has broken decisively beyond ¥160 against the US dollar, moving close to levels last seen about 40 years ago. The decline is forcing investors to question assumptions that had long shaped views on Japan’s currency.
Many market participants had expected the yen’s weakness to eventually reverse. That confidence has faded, with analysts now asking whether there is enough economic support to prevent further depreciation.
Analysts question Japan’s currency strength
Some strategists argue that Japan may no longer have the underlying economic competitiveness needed to generate strong and sustained demand for the yen.
Daiju Aoki, regional chief investment officer at UBS SuMi Trust Wealth Management in Tokyo, said the risk of a continuing yen decline over the medium to long term is not negligible. He said he often warns clients about the possibility of dollar yen reaching “¥180 or even ¥200”.
Aoki argued that a country with weaker competitiveness and reduced economic stature cannot easily maintain a strong currency.
Growth gap favors the United States
Japan’s potential growth rate is estimated at below 1%, while the equivalent rate for the United States is close to 2%.
That difference matters because currency strength is not determined only by interest rates. It also depends on demand for a country’s goods, assets and broader economic prospects.
For many years, the yen was strong in nominal terms. In 2012, it traded below ¥80 per dollar. Since then, the direction has changed sharply.
Loose policy increased supply, but demand weakened
The Bank of Japan expanded the supply of yen significantly after 2013 through ultra loose monetary policy. But analysts say the bigger issue is not only supply. It is also the weakening demand picture.
Japan’s trade deficit has become more entrenched. Although the current account remains in surplus, more of the income generated overseas is being reinvested abroad rather than brought back into Japan.
Even the recent strength in Japan’s domestic stock market has been driven largely by a small group of foreign investors, limiting the evidence of broad based domestic currency support.
Japan now earns more through overseas assets
Maki Ogawa, chief analyst at Sony Financial Group, said Japan has shifted away from a model centered on exporting goods and toward one based more heavily on overseas investment returns.
With capital continuing to move abroad, she said there is no obvious route to a stronger yen.
This structural capital outflow makes the currency more vulnerable when global investors favor higher yielding markets such as the United States.
Ukraine war accelerated the yen decline
The yen’s weakness intensified after Russia invaded Ukraine in February 2022. The jump in commodity and food prices pushed US inflation sharply higher and forced the Federal Reserve into aggressive interest rate increases.
Japan, by contrast, kept rates extremely low for longer. That widened the interest rate gap between the two countries and placed additional pressure on the yen.
Before the invasion, the dollar was trading in the ¥110 range. Within roughly six months, it had moved beyond ¥140, prompting Japan’s government to intervene with yen buying operations for the first time in 24 years.
Rate gap remains a core pressure point
Aoki said the interest rate difference between the United States and Japan has not narrowed enough to change the market dynamic.
US rates remain elevated, while Japanese rates have not risen sufficiently to reduce the nominal yield advantage of dollar assets. That continues to support a strong dollar and weak yen environment.
He also noted that since last year, yen weakness has lasted longer than interest rate differentials alone would normally explain.
Takaichi administration changes the narrative
Analysts point to the arrival of Prime Minister Sanae Takaichi’s administration in October last year as another important factor.
Ogawa said the administration’s proactive fiscal policy has drawn attention from overseas investors and altered how markets interpret the yen’s weakness.
Previously, the yen’s decline was mainly associated with low interest rates. More recently, long term yields have risen at the same time as the currency has weakened, a pattern often described as a “bad” rate increase.
Intervention risk rises near historic levels
In September last year, the yen traded below ¥150 per dollar. It is now approaching ¥162, a level not seen since December 1986.
For the past week, the currency has remained close to four decade lows and within the range where many analysts expect the authorities to consider intervention.
Government action could strengthen the yen temporarily. However, some investors believe intervention alone may not be enough to stop a deeper weakening trend.
Fed outlook and BOJ pricing favor dollar strength
Expectations for additional US rate increases have been rising, while the Bank of Japan’s likely rate path is already viewed by many investors as largely priced into markets.
This contrast leaves the dollar with an advantage. Unless investors see a more forceful shift from the BOJ or a meaningful change in US rate expectations, pressure on the yen may persist.
Weak yen creates political pressure at home
Some analysts believe the Japanese government may be tolerating yen weakness because many companies benefit from a cheaper currency.
Ogawa disagrees with the idea that authorities are comfortable with unlimited depreciation. She said a weaker yen raises import costs and worsens price pressures for households already struggling with daily expenses.
She argued that any administration concerned about approval ratings must support households and therefore should be worried about excessive yen weakness.
Government messaging could influence markets
Ogawa said Prime Minister Takaichi could help slow the yen’s decline by speaking more clearly about the damage a weak currency causes for Japanese households.
She added that the perception that the administration is accepting further yen depreciation may itself be encouraging additional weakness.
The yen’s break beyond ¥160 has therefore become more than a market move. It is now a test of Japan’s economic credibility, monetary policy path and political willingness to confront the costs of a weaker currency.
