Federal Reserve Key to Yen's Future as Currency Hits New Low

The Japanese yen has fallen to a 30-year low, causing concerns about market volatility and potentially affecting U.S. Treasury yields.

A joint intervention by the United States and Japan provided limited support for the currency, but experts say its future trajectory depends more on the Federal Reserve's monetary policy than on actions taken by the Bank of Japan or currency-exchange interventions.

David Adams, head of G10 FX strategy at Morgan Stanley Research, said that for the yen to strengthen, either U.S. interest rates need to fall, or the Bank of Japan needs to accelerate its monetary tightening, or both must occur simultaneously.

The yen's prolonged near-zero interest rates have made it the world's lowest-cost funding currency, leading investors to borrow low-cost yen to invest in higher-yielding assets, known as the yen carry trade. This has become a key source of global market liquidity, but its unwinding can amplify volatility across equity, bond, and foreign-exchange markets.

Morgan Stanley forecasts that the Bank of Japan will raise its policy rate from 1% to 1.25% in October and further to 1.5% by March next year, but the recent foreign-exchange intervention suggests it may begin hiking interest rates as early as September.