The yen slid to 162 against the dollar this week, its weakest level since December 1986, even after Tokyo spent a record $72 billion in April and May trying to hold the line. The World Socialist Web Site, summarizing coverage from Bloomberg and the Financial Times, reported that the intervention gave the currency a brief lift. The slide resumed within days.
Japan’s chief cabinet secretary, Minoru Kihara, told a press conference that the government “stands ready to take action whenever necessary.” Traders are watching 163 yen to the dollar as a possible new line in the sand, and the authorities are said to have “ample ammunition” left. Bloomberg was blunt about the odds: “History is unkind to unilateral FX intervention. And it’s downright brutal when the fundamentals are leaning the other way, which is exactly the trap Japan finds itself in.”
The rate gap
The fundamentals are mostly about interest rates. After years near zero, and at times below it, the Bank of Japan raised its base rate to about 1% in the middle of last month, the highest since 1995. That still sits under Japan’s 1.5% inflation rate. In the United States the rate is between 3.50% and 3.75%, and the Federal Reserve has ruled out cuts for the foreseeable future because of rising inflation.
The gap pushes investors to borrow in yen and invest in the U.S. and other markets, which sends yen out of the country. Lee Hardman, senior currency analyst at MUFG, told the Financial Times that crossing 162 was “another reminder of how weak the yen has become.” He pointed to the energy price shock and the Fed’s hawkish update, which is encouraging higher U.S. rates and a stronger dollar.
Prices at home
A weak yen raises import costs. Japan relies on the Middle East for more than 90% of its oil and energy, and it imports much of its food and raw materials as well. Rice, a staple, jumped last year from 2,000 yen to 5,000 yen for a five-kilogram bag. It has come down some after government intervention but remains historically high.
Exporters gain from the cheaper currency. Even so, the WSWS noted, Tokyo cannot simply let it fall, since the Trump administration and earlier U.S. governments have periodically accused Japan of manipulating its currency. Chris Turner of ING told the Financial Times that officials know intervention at this point is “an exercise in futility.” They fear a “sell Japan” mindset if government bonds and then equities come under pressure too.
Takaichi and the central bank
The Bank of Japan is under political pressure from Prime Minister Sanae Takaichi’s government to go slow on rate hikes, the report said. Last week the government unveiled a 370 trillion yen ($2.3 trillion) investment program, to run for 14 years across 17 sectors, with more than $600 billion set aside for AI and semiconductors. Companies are expected to finance over half of it. Takaichi argued that “what is lacking is domestic investment.”
Critics have raised questions about how firms will be drawn in and how much more the plan adds to a national debt near 200% of GDP, the highest among advanced economies. Yields on longer-term government bonds have already reached their highest levels since the 1990s.
A higher Bank of Japan rate would support the yen. It would also raise the cost of servicing that debt and weigh on growth. According to Bloomberg, Takaichi is expected to use the government’s Basic Policy document, due next month, to discourage further hikes.
