Japanese Yen Hits 40-Year Low as Market Bets on Fed Rate Hike

The last time the Japanese yen was this weak against the greenback, The Oprah Winfrey Show was making its national debut, and Bon Jovi’s “Livin’ on a Prayer” was climbing toward the top of the charts. 

Long considered a safe-haven asset during times of global volatility, the Japanese currency is causing jitters for foreign exchange investors and calling into question the popularity of Prime Minister Sanae Takaichi’s government and whether it will intervene. On Monday, the yen hit 161.97 against the US dollar, its lowest level since 1986. 

“Intervention is right around the corner if we don’t see a quick correction,” Andrew Hazlett, a foreign-exchange trader at Monex, told Bloomberg. But that would be “only a temporary fix if they do not address the interest-rate differential.” 

End of the ‘Lost Decades’ 

Amid weak economic growth and low inflation, the Bank of Japan kept interest rates near zero from the ’90s until 2024, when it began gradually raising them. Earlier this month, the bank increased rates to 1%, a 31-year high, in an attempt to fend off energy-driven inflation from the war in the Middle East. But across the world, the Federal Reserve is also expected to raise already-higher US interest rates this year, giving investors reason to sell the yen and invest in the dollar. 

The Japanese government did intervene last month for the first time since 2024, buying more than $73 billion to support its currency. Still, experts remain convinced that Japan’s economy is back from its “lost decades”: 

• “Don’t let recent market volatility distract from the long-term fundamentals. We think another stage of growth is likely on its way,” Kei Okamura, managing director at Neuberger Berman, recently wrote. “Japan’s recovery from the ‘lost decades’ of deflation and meager growth has been an on-again, off-again phenomenon.” 
• The multi-decade low for the yen is “significantly out of sync” with Japan’s fiscal fundamentals and relative bond yields, Cameron Systermans, the head of multi-asset strategy for Asia at Mercer, recently told CNBC. 

JGB Yields Climb: Japanese government bond yields have been rising substantially over the past year, with the 10-year now above 2.6%. That’s above the typical defined-benefit pension return objective and the return objective of many insurance companies in Japan, yet they haven’t begun repatriating capital, Systermans said. “It could just be that people are looking for JGBs to stabilize, and if that does prompt a lot of the Japanese asset owners to bring their funds back to Japan, that could act as a catalyst for yen appreciation.”  

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