Yen Tumbles to Four-Decade Low Amid Interest Rate Differentials

The Japanese yen has fallen to its weakest level in nearly four decades, breaching the 160-per-dollar mark for the first time since 1986. The currency's slide reflects a higher energy import bill and the wide US-Japan interest-rate differential.

Despite the Bank of Japan (BoJ) raising its benchmark interest rate to 1% in June, the yen has continued to weaken due to persistent interest-rate differentials between Japan and the US. The US Federal Reserve has kept its policy rate at 3.5-3.75%, while expectations that rates will remain elevated because of persistent inflation have further strengthened the dollar.

The bond market reflects the same divergence, with Japan's 10-year government bond yield rising from 0.4% in early 2023 to 2.6% by the second quarter of 2026, but remaining well below the US 10-year Treasury yield of 4.4%. This has encouraged investors to shift funds into higher-return US assets, sustaining the yen carry trade.

The yen's weakness is also attributed to Japan's dependence on imported energy, which has left its trade balance vulnerable to swings in global energy prices. A weaker yen would make dollar-denominated energy imports more expensive, further raising the import bill and widening the trade deficit.