On June 30th, the Japanese yen depreciated further, reaching a low of 162.38 against the US dollar, the lowest in 40 years.
Toshimasa Kiwara, spokesperson for the Japanese Cabinet Secretariat, stated on the day that Japan is prepared to take necessary actions in the foreign exchange market but would not comment on the exchange rate level.
Since the beginning of the year, the yen has fallen by over 3% against the US dollar. To curb the unilateral depreciation of the yen, the Japanese Ministry of Finance conducted a record foreign exchange intervention from April 28th to May 27th, injecting a total of 11.73 trillion yen. Subsequently, the Bank of Japan raised the policy rate from 0.75% to 1% on June 16th, reaching the highest level since 1995. However, after the interest rate hike was announced, the yen not only failed to stabilize but instead accelerated its slide into a deep decline.
Money has been injected, and interest rates have been raised, so why can't the yen be supported? Most institutions believe the problem is not whether Japan has taken action, but that the scale of the action is far insufficient to change the flow of global capital. The core issue lies in the wide interest rate gap between the US and Japan.
After the Bank of Japan raised interest rates to 1%, the target range for the US Federal Funds Rate remained at 3.50% to 3.75%, resulting in a nominal policy rate difference of about 345 basis points between the two countries. Matsuzawa Naka, chief analyst at Nomura Securities Market Strategy Research, pointed out that although the Bank of Japan is gradually tightening monetary policy, US Treasury yields remain high. The current 10-year Japanese government bond yield is 2.64%, while the 10-year US Treasury yield is 4.451%. Such a large interest rate differential allows investors to engage in carry trades, borrowing yen to invest in high-yield assets. In an environment where the cost of carry and fund yields still clearly favor the US dollar, a single 25 basis point increase is insufficient to reverse the logic of cross-border capital holding.
Furthermore, the Bank of Japan's policy mix also contains logical contradictions. While raising interest rates, the Bank of Japan announced that it would suspend its bond purchase reduction plan starting in April 2027, maintaining the monthly purchase volume of Japanese government bonds at around 2 trillion yen.
Analysts at Kokushin Securities point out that the monthly purchase of 2 trillion yen continuously injects liquidity into the market, which is sufficient to offset the tightening effect of the interest rate hike in terms of policy effectiveness. The Bank of Japan is constrained by its 1,343 trillion yen government bond burden and cannot truly tighten liquidity.
Several institutions have designated the 162 level as a new warning line for intervention.
Francisco Pezzolle, an analyst at ING, predicts that the 162 to 163 range will become a potential new intervention zone.
Daiwa Securities also views 162 as a possible threshold for the next intervention. If the exchange rate reaches and breaks this point, accompanied by increased unilateral speculation, the probability of authorities intervening will significantly increase.
However, Daiwa Securities also points out that given the widespread upward trend of the US dollar against major global currencies, some of the yen's depreciation is due to the overall strength of the US dollar, and the Japanese Ministry of Finance may adopt a more cautious strategy.
Japan is highly dependent on imported raw materials and energy, and the weakening yen directly increases import costs. Analysts point out that the depreciation of the yen will further drive up the cost of imported food and energy in Japan, increasing the burden on households. This cost pressure is not limited to the macro level but is transmitted through transportation, packaging, processing, and distribution costs to the final selling price. Even if the prices of some international commodities have fallen from their peaks, the weak yen continues to push up the prices of final consumer goods.
