#日元跌至40年低点 Yen Plunges to 40-Year Low

Despite the Japanese government's dual measures of rate hikes and intervention, the yen exchange rate continues to fall to a 40-year low. On June 29, the yen against the U.S. dollar fluctuated lower, briefly breaking through the 161.96 mark, the lowest level since December 1986.
Japanese government officials have repeatedly emphasized recently that they will take appropriate intervention measures against excessive foreign exchange fluctuations, and the market remains highly vigilant about such interventions. Looking at past intervention operations, they have only had short-term effects and failed to reverse the long-term depreciation trend, with the market gradually becoming desensitized to traditional intervention methods. If hope is pinned on the Bank of Japan, monetary policy adjustments also face fiscal constraints. In this "defense battle" for the yen exchange rate, the Bank of Japan finds itself in a dilemma of "willing to stabilize but unable to turn the tide."
Yen Exchange Rate Falls to 40-Year Low
In July 2024, the yen against the U.S. dollar fell to the 161.96 level, prompting the Japanese government and central bank to implement foreign exchange intervention. This level is also seen as the "defense line" for Japanese authorities. Breaking below this level means the yen exchange rate has hit its lowest point since 1986.
Since the beginning of the year, the yen against the U.S. dollar has fallen by more than 3% cumulatively. To curb the unilateral depreciation of the yen, Japan's Ministry of Finance carried out record-breaking foreign exchange intervention from April 28 to May 27, investing a total of 11.73 trillion yen.
Short-term market sentiment once gave a positive response. Market data shows that after the intervention, the yen quickly rebounded to the 155 line against the U.S. dollar. However, after only about a month, the intervention gains were completely erased, and the yen against the U.S. dollar fell back below the 160 mark.
Now, the yen continues to decline against the U.S. dollar, frequently testing the aforementioned intervention points, and the market is increasingly focusing on the possibility of the Japanese government re-entering the market for intervention. According to recent reports from Japanese media, Japanese Finance Minister Katsunobu Kato and U.S. Treasury Secretary Scott Bessent held an online meeting to discuss policy measures to address the historic depreciation of the yen, including currency intervention.
However, implementing foreign exchange intervention also has its difficulties. Zhao Qingming, vice president of the Exchange Rate Research Institute, believes that against the backdrop of a significantly stronger U.S. dollar, the Japanese government's tolerance for yen depreciation has increased, but it does not rule out the possibility of the Japanese government seizing an opportunity to intervene in the market. In terms of specific points, if the yen exchange rate breaks below its previous low and is in an even more undervalued state, the effect of re-entering the market for intervention may be better.
Zhang Meng, a senior researcher at Industrial Bank, stated that Japanese authorities need to consider costs and rules when intervening in foreign exchange.
According to the IMF's rules on freely floating exchange rate regimes, interventions should not exceed three series within six months, and one series should not exceed three working days. Japanese authorities may need to sell U.S. Treasuries first before selling dollars and buying yen in the foreign exchange market, which could cause volatility in the U.S. Treasury market and even the global bond market. Based on this, yen foreign exchange intervention will be more cautious, first observing whether intervention will occur near 162. If not, the next key level is 165.
The Key to Exchange Rate Trends Lies in the U.S.-Japan Interest Rate Spread
The enormous interest rate differential between the U.S. and Japan is the root cause of the yen's sustained pressure. Currently, the federal funds rate target range is maintained at 3.50%-3.75%, while expectations of the Fed's rate hikes continue to heat up, with the U.S. dollar index hovering at high levels.
On June 16, the Bank of Japan announced a 25-basis-point rate hike to 1%, pushing interest rates to a 31-year high. Nevertheless, the current policy rate in Japan still has a significant gap compared to the federal funds rate. Xu Jiaqi, an analyst at the Research and Development Department of Dongfang Jincheng, stated that the persistently high U.S.-Japan interest rate differential drives global funds to engage in yen carry trades—borrowing low-cost yen, converting it into dollars, and allocating to high-yield dollar assets—thus exerting continuous selling pressure on the yen.
Under the massive yen carry trade, the impact of "rate hikes" on boosting the yen exchange rate is minimal. "This yen depreciation occurred against the backdrop of the Bank of Japan's rate hike, indicating the market's lack of confidence in the Bank of Japan's current monetary policy," said Chen Zilei, president of the Shanghai Japanese Association and professor at Shanghai University of International Business and Economics.
Currently, hawkish voices within the Bank of Japan are strengthening. Bank of Japan board member Naoki Tamura recently called for rate hikes every few months and for gradually moving the policy rate toward his estimated neutral rate of 2%. However, Japan's government debt as a percentage of GDP tops the list of developed countries, and rapid rate hikes will inevitably increase the fiscal burden.
The market generally expects the Bank of Japan to maintain a gradual pace of rate hikes.
A research report from CICC believes that the Bank of Japan's next rate hike may occur around the end of the year, but risks of earlier or later moves should also be noted.
Before the U.S.-Japan interest rate differential loosens, the current exchange rate dilemma for the yen may be difficult to break. According to Zhang Meng, the yen's appreciation requires a significant trend decline in the U.S. dollar index, an accelerated rate hike by the Bank of Japan, or an increase in the hedging ratio of overseas exposure by Japanese institutional investors, or a closing of global carry trades. The first two are currently unlikely, while the key influencing factor for the latter two is the U.S.-Japan interest rate differential.
Xu Jiaqi also believes that for the long-term trend of the yen to reverse, the core still depends on whether the U.S.-Japan interest rate differential can substantially narrow and whether carry trades can systematically cool down. In the short term, the yen's trend is likely to remain weak and volatile. If Japan's Ministry of Finance releases stronger verbal intervention signals, the yen may see a technical rebound. Before the U.S.-Japan interest rate differential substantially narrows, any rebound is more likely a correction at the trading level and difficult to confirm a trend reversal.$USDJPY