On June 30, the yen's depreciation intensified, falling to a low of 162.38 per dollar, a 40-year low.
Japan's Chief Cabinet Secretary Yoshimasa Hayashi said on the same day that the government is always ready to take necessary action in the foreign exchange market but will not comment on exchange rate levels.
Since the start of the year, the yen has depreciated over 3% against the dollar. To curb the unilateral depreciation of the yen, Japan's Ministry of Finance conducted a record foreign exchange intervention between April 28 and May 27, totaling 11.73 trillion yen. Subsequently, the Bank of Japan raised its policy rate from 0.75% to 1% on June 16, the highest level since 1995. However, after the rate hike announcement, the yen not only failed to stop falling but accelerated its decline.
Despite massive intervention and rate hikes, why does the yen remain weak? Most institutions believe the problem lies not in whether Japan has taken action, but in the insufficient magnitude to change global capital flows. The core issue is the wide interest rate gap between the US and Japan.
After the BOJ raised rates to 1%, the US federal funds rate target range remains at 3.50% to 3.75%, leaving a nominal policy rate spread of about 345 basis points. Wataru Akiyama, Chief Analyst of Equity Market Strategy Research at Nomura Securities, pointed out that despite the BOJ's gradual tightening, US Treasury yields remain high. Japan's 10-year government bond yield is 2.64%, while the US 10-year yield is 4.451%. Such a large spread is sufficient to sustain the carry trade where investors borrow yen to invest in higher-yielding assets. In an environment where the cost of carry and capital returns still clearly favor the dollar, a single 25-basis-point rate hike is far from enough to reverse the logic of cross-border capital holdings.
In addition, the BOJ's policy mix contains a logical contradiction. Alongside the rate hike, the BOJ announced that starting April 2027, it will suspend its tapering of bond purchases, maintaining monthly purchases of Japanese government bonds at around 2 trillion yen.
Analysts at Guoxin Securities noted that monthly purchases of 2 trillion yen continuously inject liquidity into the market, effectively offsetting the tightening effect of the rate hike. The BOJ is constrained by its huge government bond holdings of 1,343 trillion yen, making it difficult to truly tighten liquidity.
Multiple institutions have now identified the 162 level as a new intervention warning line.
ING analyst Francesco Pesole noted that the 162 to 163 range is expected to become a potential new intervention zone.
TD Securities also sees 162 as the next possible intervention threshold. Once the exchange rate hits and breaks this level, accompanied by intensified unilateral speculative activity, the probability of authorities acting will increase significantly.
However, TD Securities also cautioned that given the current broad strengthening of the US dollar against major global currencies, part of the yen's depreciation stems from overall dollar strength, and Japan's Financial Services Agency may adopt a more cautious strategy.
Japan is heavily dependent on imported raw materials and energy, and a weaker yen directly amplifies import costs. Analysts pointed out that a weaker yen will further push 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 passed through transportation, packaging, processing, and distribution costs to terminal prices. Even as some international commodity prices have fallen from highs, the weak yen continues to push up consumer goods prices.
