Despite coordinated intervention by Japan and the US, the yen's downward trend has continued, with more than half of its gains reversing even after the intervention in late July. A range of factors is weighing on the yen, including the widening US-Europe interest-rate differential and Japan's fiscal and financial conditions.
Despite the government's and the Bank of Japan's record-scale yen-buying intervention of ¥11.7349 trillion over the month through 27 May, they were unable to halt the yen's downward trend, and the yen reached a roughly 40-year low against the dollar on 23 July. The Japanese and US finance ministers subsequently announced on the 31st that they had conducted coordinated intervention and indicated that they were prepared to intervene again if necessary. Meanwhile, Japan is estimated to have spent approximately ¥8.45 trillion on unilateral intervention on the 30th, among the largest amounts ever, and approximately ¥5.33 trillion on the 31st.
The intervention's effect has been limited, and the yen's decline has continued under the influence of interest-rate differentials and medium- to long-term fiscal and geopolitical risks. With Japan's high dependence on energy imports, fiscal deficit and waning expectations for US rate cuts all weighing on the yen, conditions continue to favour dollar-denominated assets on a relative basis. There is a view in the market that although short-term moves can be substantial, intervention alone is unlikely to bring about a lasting turnaround without an improvement in underlying fundamentals.
Factors behind the yen's weakness include ultra-low interest rates, the widening Japan-US interest-rate differential, declining confidence in Japan's fiscal position and higher import costs for energy resources. The Bank of Japan raised its policy rate to around 1.0% at its June meeting, but this remains low by global standards, and the interest-rate differential is still widening. The prolonged situation in the Middle East is also contributing to pressure on the yen.
In addition to foreign-exchange intervention, measures to halt the yen's decline include narrowing the interest-rate differential through monetary tightening and making Japanese assets more attractive by expanding domestic investment. The government and the Ministry of Finance have indicated that they are considering the use of the FIMA facility, seeking a way to secure dollar funding without liquidating assets. The prevailing view is that the effect of intervention is short-lived and that improving fundamentals will be necessary over the longer term.