Yen Heads for Biggest Weekly Decline Since May Despite Tokyo's Support Pledges
Key Takeaways
- •The yen is experiencing its biggest weekly drop since May, reaching 40-year lows against the US dollar despite repeated intervention pledges from Japanese officials.
- •A persistent interest-rate differential between the Bank of Japan's near-zero rates and the Federal Reserve's higher-rate environment continues to drive the yen's depreciation and carry-trade activity.
- •Japan's direct currency intervention in 2022, which cost approximately 9 trillion yen across multiple operations, provided only temporary relief from the yen's decline.
- •Rising oil prices are exacerbating the yen's weakness, as Japan depends on foreign suppliers for about 90% of its crude oil, deepening its trade deficit.
- •The euro and British pound have gained modestly against the dollar, underscoring that Japan's unique monetary policy stance is amplifying the yen's vulnerability relative to peer currencies.
The Japanese yen is on track for its most significant weekly drop since May, sliding to 40-year lows against the US dollar despite repeated pledges from Tokyo to support the currency.
Japan's measures aimed at bolstering the yen have so far proven ineffective in reversing its prolonged depreciation. Finance Ministry officials, including Vice Finance Minister for International Affairs Masato Kanda, have repeatedly warned that authorities are watching markets closely and stand ready to take appropriate action against excessive volatility. Japan last intervened directly in 2022, spending roughly 9 trillion yen (approximately $60 billion at the time) across several operations to buy the yen, but those efforts provided only temporary relief.
The currency's sharp decline underscores the persistent pressure from a wide interest-rate differential between the Bank of Japan's ultra-loose monetary policy stance and the US Federal Reserve's higher-rate environment. Even after the BOJ ended its negative interest rate policy in March 2024 — its first rate hike in 17 years — the central bank has kept rates near zero, leaving the yield gap with the United States substantially intact. This differential continues to drive carry-trade activity, where investors borrow in the low-yielding yen to invest in higher-yielding currencies.
Rising oil prices have further complicated the outlook, rekindling inflation concerns and reinforcing the dollar's strength. Japan, a major energy importer that relies on foreign suppliers for roughly 90% of its crude oil, is particularly sensitive to elevated crude prices, which widen its trade deficit and add downward pressure on the yen.
Meanwhile, the euro and the British pound have recorded modest gains against the dollar, bucking the broader trend of dollar dominance seen in the yen's recent slide. The divergence highlights how currency-specific factors — including Japan's unique monetary policy posture among developed economies — are amplifying the yen's vulnerability relative to its peers.
Source: Economic Times Markets