Yen's Prolonged Decline May Finally Be Reversing
The yen's prolonged decline may finally be coming to an end. After hitting a low in October 2022, the currency began to rebound but resumed its downward trend by 2024, reaching a weak level of around ¥150 to the dollar.
A key factor behind the yen's depreciation is the widening gap between Japanese and US interest rates. In March 2020, the US Federal Reserve cut the federal funds rate to 0.25%, but in March 2022, it began raising rates to combat inflation. Japan, meanwhile, maintained its negative interest rate policy and yield curve control.
The interest rate gap has driven the yen-dollar exchange rate, with the yen weakening as the gap widened in 2022. The currency continued to decline even after US economic data proved surprisingly strong in 2023, with the Fed raising rates four more times and Japan sticking to negative rates and yield curve control.
A massive intervention by Japan's Ministry of Finance on July 30, 2026, saw ¥6 trillion spent buying yen. The US authorities joined in coordinated intervention, selling euros and buying yen. Markets could no longer ignore the possibility of additional intervention after these actions, which eventually led to a shift in market sentiment.
The prospects for the yen's rebound depend on three factors: resource prices, monetary policy, and fiscal discipline. If crude prices remain high at around $100 per barrel, Japan's trade balance will deteriorate further. The BOJ must show an aggressive stance on rate hikes to prevent a vicious cycle of higher resource prices leading to larger trade deficits and a weaker yen.