Yen Crisis: Japan's Fiscal Risk Sparks U.S.-Japan Currency Intervention

The yen hit a 40-year low in July 2026, touching 164 against the U.S. dollar. This marked the lowest level since November 1986.

The traditional explanation for yen depreciation was based on the interest rate differential between the U.S. and Japan. However, this correlation has collapsed in recent years, and a new factor has emerged: the spread between Japanese government bond yields.

This spread is driven by investor concerns over Japan's fiscal risk, particularly under Prime Minister Sanae Takaichi's aggressive spending policies. Her 'Responsible Active Fiscal Policy' has been met with skepticism by investors, who are dumping long-term JGBs and causing the yen to depreciate further.

In response, the Japanese government intervened in the currency market, buying up yen in a joint operation with the U.S. for the first time in 15 years. The intervention was not just about supporting Japan's economy but also about protecting the value of U.S. Treasuries, which are held by Japan as foreign exchange reserves.