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The Japanese yen fell to around 162.4 per dollar in Asian trading on Tuesday morning, its lowest level since 1986.
The drop extends a punishing run for the yen, which has kept weakening despite the Bank of Japan’s efforts to support it, and now revives the prospect that the authorities will step into the market directly.
Japan’s finance minister, Satsuki Katayama, has already responded to the situation by stating that the government was ready to take “appropriate” and even “decisive” action against excessive currency moves, adding that she had confirmed with Washington that such a step remained an option.
Traders are now watching closely for any sign that Tokyo is selling US dollars to prop up the yen, as it did in the spring.
At the heart of the weakness is the current wide gap between Japanese and American interest rates.
Even after the Bank of Japan raised its benchmark to 1% in mid-June, its highest since 1995, Japanese yields remain far below those in the US, where ten-year government bonds have recently paid around 4.5%, compared with roughly 2.6% in Japan.
That gap sustains the so-called carry trade, in which investors borrow cheaply in yen to buy higher-yielding assets elsewhere, continually pushing the currency down.
A robust dollar has compounded the pressure.
The greenback has drawn safe-haven demand from tensions around the conflict involving Iran, while expectations that the US Federal Reserve could raise rates later this year, even as the Bank of Japan moves cautiously, have widened the divide further.
Japan’s heavy reliance on imported energy, which is costlier amid elevated oil prices, has also added to demand for US dollars.
A test for Tokyo
The renewed slide is a headache for policymakers who have already thrown considerable firepower at the problem.
Between April and May, Japan spent a record ¥11.7 trillion (€63.3bn) intervening in currency markets, the largest such effort on record, yet the Japanese yen has continued to weaken.
Domestic politics has not helped, with the big-spending, growth-focused agenda of Prime Minister Sanae Takaichi raising doubts about Japan’s fiscal discipline.
Analysts say the immediate risk of intervention is high, given that speculative bets against the Japanese yen have climbed to multi-year peaks and a fresh four-decade low tends to sharpen political anxiety in Tokyo.
However, many doubt that buying the currency would reverse its course for long, since the underlying rate gap remains firmly against it.
The Bank of Japan’s next policy decision, due on 31 July, is now in sharp focus, with further rate rises seen as the more durable route to stemming the decline.
For now, the Japanese yen remains at the mercy of forces its central bank has struggled to control.