The US dollar rose to ¥163 against the yen despite the narrowing Japan-US interest-rate differential, driven by higher Japanese long-term interest rates and concern over fiscal discipline. Long-term rates fell after peaking in October, and their future direction will depend on share-price movements.
The divergence between the dollar-yen rate and the Japan-US interest-rate differential widened from mid-2025, and the US dollar moved toward yen depreciation despite the narrowing differential. The yen actually weakened to ¥163 per dollar, but this could not be explained by the interest-rate differential alone, with the rise in Japanese long-term interest rates viewed as the main cause.
Concern over Japan’s fiscal discipline lay behind the rise in long-term interest rates, and the prevailing view was that a rise in long-term rates accompanying yen selling was associated with concern over fiscal discipline.
Long-term rates had been rising in early October, but from early October onward US long-term rates fell against a backdrop of falling share prices, and Japanese long-term rates also declined regardless of the direction of the Japan-US interest-rate differential. Share-price developments are expected to be a major determinant of the future movement of long-term rates.
If the stock-market decline spreads further, long-term rates could fall again. If the decline runs its course, long-term rates could rise again in response to concern over fiscal discipline. The future direction of yen depreciation associated with fiscal concerns is considered dependent on developments ahead.