Yen is getting close to territory that made Japan very uncomfortable last time. Officials are making noise. Traders are watching closely. US markets are closed Friday so currency markets could get all the attention today.
Yen Is Getting Dangerously Close to Historic Lows
USD/JPY broke through 161.50 late Thursday. Slid as far as 161.80 at one point. That is the weakest yen has been since July 2024. One more push above 161.96 and the pair reaches levels not seen since 1986. Forty year lows.
Move accelerated after Japanese stock markets closed for the day. With nobody left in Tokyo to react the yen kept sliding on thin liquidity. FX desks around the world noticed.
US equity markets are shut Friday for Juneteenth. That removes one of the usual distractions. Attention in global markets today could easily shift toward currencies and Japan specifically. Quiet equity session in America often means more action in FX. Japan is sitting right in the middle of that spotlight.
Japanese Officials Are Getting Louder
Warning language from Tokyo is escalating. Finance Minister Satsuki Katayama reportedly told G7 counterparts that Japan is prepared to take decisive action against speculative moves in the yen if necessary. That is stronger language than the usual boilerplate about monitoring volatility closely.
It is not coming out of nowhere. Japan already spent more than $70 billion intervening in currency markets earlier this year trying to slow the yen’s decline. It worked for a while. Then the dollar resumed climbing and erased most of those gains. Intervention bought time but did not fix the underlying problem.
Bank of Japan Deputy Governor Ryozo Himino added to the chorus saying policymakers are watching currency moves carefully because of their impact on inflation and economic stability. Not pulling the trigger yet. But clearly not ignoring it either.
Why the Yen Keeps Losing Ground
Problem for the yen is structural right now. It is caught between two forces and neither one is moving in its favor.
US Federal Reserve is leaning toward more rate hikes. Dollar gets stronger when rate expectations go up. Fed funds futures are now pricing in a hike by October. That keeps upward pressure on the dollar and downward pressure on everything paired against it including the yen.
On the other side Bank of Japan just raised rates to 1% this week. Highest since 1995. Did not help. Markets looked at 1% Japan versus 3.5% to 3.75% America and shrugged. The gap between US and Japanese yields is still enormous. Money flows toward higher yields. That means money flows away from yen and toward dollars. Rate hike from BoJ was too small to change that math in any meaningful way.
Who Gets Hurt When Yen Is Weak
Weak yen is not all bad for Japan. Export companies love it. Makes Japanese goods cheaper in foreign markets. Toyota, Sony, other big exporters see their overseas revenues convert back into more yen. Corporate earnings for those companies look better.
But the other side of a weak yen is expensive imports. Japan imports almost everything in terms of energy and a lot of its food and raw materials. When yen is weak all of that costs more in domestic terms. Fuel bills go up. Grocery bills go up. Households feel it directly.
That is the tension Japanese policymakers are managing. Some of the economy benefits from a weaker currency. The average household does not. At a certain point the political pressure from rising import costs outweighs the benefit to exporters. Japan appears to be approaching that point again given how quickly the warnings are escalating.
What Happens Next
Three scenarios worth watching over the next few sessions.
Japan intervenes directly. Buys yen aggressively to push the pair back below 160. Would cause a sharp short term move. Probably 300 to 500 pips in a hurry based on what happened earlier this year. Effect may be temporary again unless something changes in the underlying rate differential.
Dollar weakens on its own. If Iran peace deal signing today goes smoothly and inflation data starts cooling the case for Fed hikes weakens. Dollar pulls back and takes some pressure off the yen without Japan needing to spend reserves.
Yen breaks above 161.96. That opens up 1986 territory psychologically. Would likely trigger more urgent intervention language and possibly actual action from Tokyo.
Today being a quiet day for US equities makes the FX market the main arena. All eyes on 161.96.