The dollar fell as low as 155.20 yen after the US and Japan confirmed coordinated currency intervention, but analysts warn that wide interest-rate differentials and Japan’s energy import burden could continue to weigh on the yen.
The US dollar weakened sharply against the Japanese yen on Monday after Washington and Tokyo confirmed they had jointly intervened in the foreign exchange market, an unusually coordinated move aimed at stemming the Japanese currency’s prolonged decline.
The dollar fell to nearly 155.20 yen in early Monday trading following confirmation of the intervention before recovering somewhat to around 156.75 yen by late afternoon in Tokyo.
The move marked a significant reversal from late last week, when the dollar was trading above 163 yen and touching levels not seen in roughly four decades. The dollar had already slipped below the 160-yen mark after markets began suspecting that authorities had stepped in.
US President Donald Trump confirmed on Sunday that Washington had assisted Japan, while Japanese Finance Minister Satsuki Katayama said Japan’s finance ministry had purchased yen in coordination with the US Treasury Department.
Katayama also indicated that authorities were prepared to act again if necessary, saying Japan would not hesitate to undertake further joint intervention.
Why Japan is trying to strengthen the yen
The yen’s prolonged weakness has become a major economic and political concern for Tokyo. While the cheaper currency has helped attract millions of foreign tourists, it has also raised the cost of imported goods in an economy heavily dependent on overseas energy and other commodities.
More from BusinessHigher oil prices have intensified those pressures, adding to inflation and increasing the cost-of-living challenge facing Prime Minister Sanae Takaichi’s administration.
Previous efforts this year to bolster the yen had only a limited impact, increasing pressure on policymakers to consider stronger measures.
The latest action is particularly significant because coordinated intervention involving the US is relatively rare. One of the most prominent previous examples of international currency intervention involving Japan came after the devastating earthquake and tsunami in 2011.
Interest rate gap remains a key problem
At the heart of the yen’s weakness is the large interest-rate differential between the US and Japan.
Investors have been able to sell low-yielding yen and move money into higher-yielding dollar-denominated assets. Both the Bank of Japan and the US Federal Reserve kept interest rates unchanged at their latest policy meetings, leaving that gap largely intact.
The Bank of Japan’s benchmark interest rate currently stands at 1 per cent, its highest in 31 years but still substantially below the Federal Reserve’s 3.5-3.75 per cent range.
Japan’s central bank is also expected to remain cautious about further tightening as it assesses risks from geopolitical tensions, higher energy prices and their impact on domestic economic activity.
Meanwhile, higher oil prices and inflationary pressures have limited the Federal Reserve’s room to cut US interest rates, potentially keeping the yield advantage of dollar assets elevated.
Why Washington joined the intervention
Trump described Washington’s participation as a show of support for Japan and said the US had also received a financial benefit from the operation.
The intervention may suit US economic interests as well. A weaker dollar against the yen makes American products relatively cheaper for Japanese buyers, potentially improving the competitiveness of US exports to Japan.
The move also gives Washington a relatively low-cost way to support a key Asian ally while attempting to prevent extreme currency movements from spilling over into global foreign exchange and bond markets.
Can the intervention reverse the yen’s decline?
The coordinated action appears to have had a stronger immediate impact than Japan’s earlier interventions, with the yen holding on to a significant portion of its gains. However, the structural forces that have driven the Japanese currency lower have not disappeared.
Apart from the wide US-Japan interest-rate gap, Japan continues to face a sizeable energy-import bill. Proposed fiscal measures, including cutting the sales tax on food to 1 per cent from 8 per cent and increasing government spending, could also add to inflation and government debt, potentially putting renewed pressure on the currency.
That means intervention could slow or temporarily reverse speculative moves against the yen, but a sustained recovery may ultimately depend on changes in monetary policy, interest-rate differentials and energy prices.
For now, the rare coordinated action by Washington and Tokyo has sent a clear signal to currency markets: both governments are prepared to push back against an uncontrolled slide in the yen.
