The yen has fallen to its lowest level against the US dollar since 1986, raising market concerns about potential renewed intervention by the Japanese government in the foreign exchange market, which could impact U.S. stocks, the U.S. Treasury market, and the global economy. The decline in the yen is primarily driven by a rebound in the dollar and shifting expectations regarding U.S. interest rates: the oil price shock triggered by the U.S.-Iran conflict has intensified inflationary pressures, leading traders to speculate that the Federal Reserve may maintain high interest rates or even hike rates in the coming months. Meanwhile, although the Bank of Japan raised its benchmark interest rate to 1% on June 16—its highest level since the 1990s—it remains significantly lower than the Federal Reserve’s range of 3.5% to 3.75%, prompting capital flows toward higher-yielding U.S. assets and further depressing the yen.
The prolonged weakening of the yen is increasing economic pressure on Japan. For years, Japan has relied on zero or negative interest rates to stimulate its economy and avoid deflation. Starting in 2024, with inflation exceeding its 2% target, Japan began raising rates, but the persistent interest rate differential continues to weigh on the yen. For a country highly dependent on imports of food and energy, currency depreciation raises import costs and living expenses. This pressure has become even more pronounced amid rising oil prices due to the ongoing Middle East conflict. The Japanese government previously intervened in the foreign exchange market earlier this year to support the yen, but failed to halt the downward trend. With the yen now hitting a new record low, markets are preparing for another round of intervention.
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Original article: toutiao.com/article/1869575148436555/
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