The US dollar against the Japanese yen jumped above 163, hitting a 40-year high! Japan’s $71.9B market-stabilizing effort still couldn’t hold.

The US dollar against the Japanese yen jumped above the 163 level on Tuesday, reaching the highest level since 1986; despite Japan’s authorities having deployed $71.9 billion to support the currency from late April to late May this year, they still failed to reverse the downward trend.
(Background recap: Japan spent $73 billion buying yen or trying to defend the exchange rate, but still couldn’t hold it; the new plan lets Japan’s $1.3 trillion in foreign-currency reserves “earn a bit more.”)
(Additional background: Goldman Sachs sharply cut its yen outlook: the exchange rate could weaken another 6.5% within a year, under the dual pressure of the US-Japan interest-rate differential and carry-trade dynamics.)

The Bank of Japan and the Ministry of Finance are in a bind. Letting the yen keep weakening could pressure household living costs and consumer prices, while intervening abruptly could have limited effect—or even prove futile. On Tuesday, the US dollar against the Japanese yen rose above the 163 level to the highest level since 1986. With the market now focusing on 165 as the new line of defense, investors are watching whether the authorities will act—and if so, when.

The $71.9 billion defense still can’t hold

Japanese authorities have already taken action. From April 28 to May 27 this year, the Ministry of Finance spent 11.73 trillion yen (about $71.9 billion) in stepped-up support, yet the exchange rate has still fallen through the prior defense line, suggesting that relying solely on firepower intervention may be difficult to reverse the trend. Just last week, Japanese Finance Minister Kayotsuki Katayama used the toughest wording in weeks to say it was not ruled out that authorities could intervene again. However, verbal warnings have long had limited deterrent effect on FX markets.

Based on the screen numbers, the yen has currently weakened to 163.24 yen per $1. At the same time, tensions between the US and Iran have again escalated, pushing up oil prices; rising US Treasury yields, in turn, add fresh momentum to the dollar. The US dollar index (DXY), which tracks six major currencies, rose in step by 0.2% to 101.173.

Analysts warn: there are hardly any policy tools left

In a report, Nomura Securities’ chief FX strategist Yujirō Gotō said: as long as oil prices remain elevated and the authorities have been slow to enter the market, the pattern of a gradual rise in the US dollar versus the Japanese yen may continue. What the market is closely watching next is whether the authorities will act—and when.

Bloomberg Markets Live macro strategist Brendan Fagan offered a more macro interpretation of this slide. He believes the yen has already fallen to a low not seen since December 1986. Combined with the rise in global bond yields and persistently high energy prices, these two factors effectively tie Japan’s authorities’ hands, leaving policymakers with few effective tools available to respond.

With 162—long regarded as the official defense line—having been breached now, the market is revising upward its tolerance for a weaker yen, and 165 is increasingly being seen as the new threshold for intervention. Merrill Lynch Securities also warned that if the authorities fail to act for a long time, the yen could keep weakening to 170.