Yen Falls to 161.98 Per Dollar, Sinking to Weakest Level Since 1986

Finance Minister Satsuki Katayama Says It Is Time for "Bold Action"

The yen’s slide to a 40-year low is shaking Japan’s economy. The government has deployed its largest-ever foreign-exchange intervention and raised interest rates, but markets have barely budged. Japanese media have warned the currency may be entering a bottomless decline.

The yen fell to 161.98 per dollar in New York trading on June 29, breaking below the previous trough of 161.96 per dollar set in July 2024, Nihon Keizai Shimbun and NHK reported. That level had been viewed as a psychological threshold. The move pushed the yen to its weakest level since December 1986, shortly after the Plaza Accord.

Japanese media said the drop reflected strengthening market bets that the Federal Reserve could raise interest rates later this year, as inflation linked to the Iran war persists and the labor market continues to recover.

The yen’s broader decline began in 2022, and the currency has fallen nearly 30% against the dollar over the past four and a half years. Selling accelerated after Prime Minister Sanae Takaichi took office last year and signaled she would pursue policies favoring monetary easing. Since March, the Iran war has also driven demand for the dollar as a safe-haven asset during times of crisis. The dollar’s recent strength has added further pressure on the yen. China’s decision the previous day to tighten export controls on Japanese companies and institutions has compounded the economic strain.

Since the weak-yen cycle began, the Bank of Japan has been moving away from the easy-money policies it maintained for about a decade and toward policy normalization. The policy rate has returned to positive territory from below zero, and on June 16 the BOJ lifted it to 1%, the highest level since 1995. Even so, inflation-adjusted real interest rates remain low, reinforcing the view that rate increases are failing to keep up with price growth. That has left deeply rooted pressure to sell the yen intact.

The currency’s decline is also fueling concern about Japan’s economy. A weaker yen has boosted exporters’ profits and helped drive Japanese stocks to record highs. But it has also raised the cost of dollar-denominated imports such as crude oil and natural gas, pushing up prices across the economy from food to electricity bills. Surging living costs are adding to the burden on households and are seen as a risk to Takaichi’s approval ratings.

The challenge for policymakers is that the yen’s weakness has not stopped despite Japan’s biggest-ever market intervention. After the exchange rate first moved past 160 yen per dollar, the government spent 11.73 trillion yen, or about $74 billion, from April 28 to May 27. The impact of the BOJ’s rate increases has also been limited because markets largely expect the Fed to maintain a hawkish stance for the time being.

Katayama recently said Japan was prepared to take "bold action" to curb excessive speculative moves in the foreign-exchange market, signaling the possibility of additional intervention. NHK said that if the yen falls to levels last seen in December 1986, there is little chart history left as a reference point, leaving the market in "uncharted territory" with no clear sense of how far the currency could slide.

Kang Kyung-ju, Hankyung.com reporter qurasoha@hankyung.com