Japanese Yen falls to nearly 40-year low: FX intervention risk draws attention

Under the influence of factors such as the renewed escalation of the US-Iran conflict, rising international oil prices, and a strengthening US dollar, the Japanese Yen (JPY) exchange rate against the US dollar (USD) briefly fell to the 163 JPY per 1 USD range on July 21, reaching a new low since December 1986.

The Japanese Yen continues to weaken, falling to a nearly 40-year low, and the market is watching whether Japanese authorities will intervene in the foreign exchange market again.

Last month, the Bank of Japan (BOJ) raised its policy interest rate by 25 basis points to 1.0%, reaching its highest level since 1995, but the Yen has yet to find support. Hu You, Senior Research Analyst at FSM Global Research and Portfolio Management Department, stated in the article JPY Exchange Rate Falls to 40-Year Low: Has the Market Overreacted? that because the market has largely priced in the rate hike expectation, its boosting effect is limited.

She pointed out that the core reason for the Yen's continued pressure lies in the persistently high interest rate differential between the US and Japan. Although the Bank of Japan has raised its policy rate to 1.0%, the US federal funds rate remains high at 3.50% to 3.75%. This interest rate differential environment keeps carry trades (Carry Trade), where low-interest Yen is borrowed to invest in high-yield US dollar assets, actively flowing, subjecting the Yen to long-term depreciation pressure.

Chart source: Yahoo Finance as of July 28, 2026

Although the weak Yen boosts profits for export-oriented companies, import costs also rise accordingly. The resulting inflation is increasing the burden on businesses and the public.

To counter rising energy prices and inflationary pressures caused by the Middle East situation, the Japanese government last month approved a supplementary budget totaling approximately 3.11 trillion Yen (approximately 24.6 billion Singapore Dollars). However, expanding fiscal spending could further exacerbate the country's already heavy debt burden. Japan's fiscal year 2026 budget reached 122.3 trillion Yen (approximately 968 billion Singapore Dollars), an increase of about 6% from the previous year, setting a new historical high. Japan's government debt-to-GDP ratio is among the highest in developed economies. Large-scale budgets and subsidies could intensify market concerns about fiscal sustainability and put pressure on the Yen when investor confidence wanes.

Bank of Japan Rate Hike Expectations Rise

Faced with the continuous decline of the Yen, whether the Japanese government will intervene again has become the market's focus. Japanese Finance Minister Satsuki Katayama stated that authorities are prepared to take appropriate measures to address currency fluctuations. The Japanese government injected a record 11.73 trillion Yen (approximately 92.9 billion Singapore Dollars) between late April and May to support the Yen exchange rate. Under these intervention measures, the Yen exchange rate briefly recovered to around 156 Yen.

In recent months, Japanese authorities have shifted to unannounced, surprise interventions to support the continuously weakening Yen. The Ministry of Finance (MOF) appears to no longer rely on verbal warnings that give the market time to adjust positions, but instead chooses to intervene without prior notice, thereby unexpectedly disrupting speculators' strategies and increasing the cost and risk of shorting the Yen.

As the Bank of Japan continues to push for monetary policy normalization, market expectations for another BOJ rate hike this year are rising. Hu You pointed out in Japan H2 2026 Outlook: The Rally Isn't Over, But Winners Are Rotating that the BOJ remains on a path of policy normalization, and if inflation remains high or the Yen continues to weaken, a second rate hike could occur in the second half of this year.

On the other hand, US inflation data for June showed a significant cooling, leading the market to believe that the necessity for further rate hikes or tightening policies by the Federal Reserve (Fed) has decreased. If the Fed does not raise rates further, the pressure for the US-Japan interest rate differential to widen will ease.

Given the resilience of the Japanese economy, coupled with accelerating inflation expected to support another central bank rate hike this year, and the recent cooling of Fed rate hike expectations, these factors collectively contribute to the Yen gradually stopping its depreciation and recovering.

When discussing the Investment Outlook for Q3 This Year, iFAST Research downgraded Japan's market rating from 3.5 stars to 3.0 stars, but still maintained an attractive overall assessment. The research team believes that ongoing corporate reforms continue to drive improvements in return on equity (ROE) and price-to-book (P/B) ratios. Stimulus measures introduced by Japanese Prime Minister Sanae Takaichi are also expected to gradually benefit small-cap stocks. Therefore, in terms of investment strategy, the research team prefers Japanese small-cap stocks over the Nikkei 225 index, and will consider hedging Yen exchange rate risk for large-cap holdings.

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