Japan's Yen Slides to Weakest Level Since 1986 Amid Global Inflation and US-Iran War

The yen's weakness has become a pressing concern for Japan's policymakers and the US government. In late April, Japan spent almost $74 billion to support the currency following two months of steep declines. However, the resulting rebound was short-lived, and by July 23, the yen had slid further to its weakest against the US dollar since 1986.

Several factors are weighing on the yen, including the gap between Japan's ultra-low interest rates and those in the US and other major economies. This has encouraged investors to borrow cheaply in yen and invest in higher-yielding assets overseas, resulting in capital outflows that put persistent pressure on the Japanese currency.

The US-Israel war with Iran has added pressure on the yen, as Japan imports almost all its energy from the Middle East, making it highly exposed to disruptions in the region. Higher oil prices mean Japan must pay more for energy imports in US dollars, boosting demand for foreign currency at the expense of the yen.

Japan's government has used a range of options to slow the yen's decline, including direct intervention and verbal warnings to speculators. The authorities have historically sought to weaken the yen but have recently aimed to strengthen it. Before 2026's successive interventions, the last such operations came in 2024, when the government spent almost $100 billion buying yen to prop up the currency.

Currency intervention can be effective in the short term but is unlikely to reverse a broader market trend unless economic fundamentals are also addressed. The limits of intervention were on display in April and July this year, as the authorities intervened but the yen's decline continued.