The Japanese yen hit a fresh 40-year low of around 162.4 per dollar in Asian trading on Tuesday. This extends a severe decline despite Bank of Japan support efforts, raising the prospect of direct market intervention.
Finance Minister Satsuki Katayama warned the government is ready for "decisive" action, confirming coordination with Washington. Traders are watching for signs of Tokyo selling US dollars to support the yen.
The core issue is a vast interest rate gap. Even after the Bank of Japan raised its benchmark to 1%, US ten-year yields remain far higher at around 4.5%. This sustains the carry trade, where investors borrow in yen to buy higher-yielding assets, pushing the currency down.
A strong dollar, fueled by safe-haven demand amid geopolitical tensions and expectations of further US Federal Reserve hikes, compounds the pressure. Japan's reliance on costly imported energy also increases demand for dollars.
Tokyo faces a significant challenge. Record interventions of ¥11.7 trillion between April and May failed to reverse the trend. Political pressure is mounting under Prime Minister Sanae Takaichi's growth-focused agenda.
While further intervention is likely, many doubt its long-term effectiveness. The Bank of Japan's July policy meeting is now critical, with deeper rate hikes seen as the most sustainable solution. The yen's fate remains tied to forces beyond its central bank's immediate control.