Japan spent billions to prop up the yen. Why is it still weak?

[TOKYO] The yen’s weakness has become a growing issue for Japan’s policymakers, given its impact on import prices and household costs. 

Concerns intensified in late April, when the currency slid to its weakest level since July 2024. Authorities responded by spending almost US$74 billion – a record amount for a month-long period – to prop up the currency, triggering a sharp rebound.

But the effect was short-lived, and the yen remains weak. Finance Minister Satsuki Katayama has since reiterated that the government stands ready to take “appropriate action”, raising the prospect of further intervention.

Why is the yen weak?

The US-Israel war with Iran has added fresh pressure on the yen. Japan imports almost all of its energy, with more than 95 per cent of its oil imports coming from the Middle East, making it highly exposed to disruptions in the region.

Higher oil prices mean Japan must pay more for energy imports – in dollars – boosting demand for foreign currency at the expense of the yen.

Structural factors continue to play a role as well. The gap between Japan’s ultra-low interest rates and those in the US and other major economies remain wide, encouraging investors to borrow cheaply in yen and invest in higher-yielding assets overseas.

The resulting capital outflows have put persistent pressure on the Japanese currency. While the Bank of Japan (BOJ) raised interest rates in December to the highest in 30 years, they remain low by international standards. 

Mounting global inflation stemming from the Middle East conflict has also shifted expectations around the trajectory of US interest rates – from cuts to hikes – making dollar-denominated assets even more attractive and adding further pressure on the yen.

The yen weakened further against the dollar in late April after BOJ refrained from signalling when it might next raise interest rates, underscoring the importance of the central bank’s messaging for the currency market.

Why is the yen’s weakness a cause for concern?

The yen’s slide over the past decade or so has helped transform Japan into an affordable travel destination for millions of foreign tourists, while boosting the profits of the nation’s biggest exporters. 

But in an economy heavily dependent on imported energy and raw materials, the feeble yen has also driven up costs, fuelling inflation for households and squeezing margins for domestically focused businesses. The resulting cost-of-living crunch contributed to the downfall of two prime ministers before current leader Sanae Takaichi took office. 

Beyond domestic considerations, there’s another reason why Japan’s government may want to support a stronger yen. US President Donald Trump has repeatedly criticised Japan’s weak currency, arguing that it gives Japanese manufacturers an unfair trade advantage. This issue has featured in trade negotiations between the two nations.

When the currency hit 160.72 against the dollar on Apr 30 – its weakest level in almost two years – those concerns likely came to a head, prompting the government to intervene. 

What is currency intervention?

When a country’s central bank steps into the foreign exchange market with the intention of strengthening or weakening its currency, that’s known as direct intervention. 

Japan is party to international pacts that stipulate markets should determine exchange rates. At the same time, the Group of 20 has acknowledged that excessive or disorderly currency moves can threaten economic and financial stability, giving members wiggle room to intervene when volatility spikes. 

In Japan, the Finance Ministry decides when to intervene and BOJ carries out the operation through a small number of commercial banks.

Those banks either buy yen and sell dollars to strengthen the local currency, or the reverse to weaken it. The scale of the transactions depends on how much impact the ministry seeks and how quickly the market reacts. 

The dollars typically come from Japan’s foreign reserves in the form of cash or US Treasury holdings. Japan appeared to sell some of its Treasuries when it intervened to prop up the yen in 2024. There are also indications authorities drew on their holdings of foreign securities, including US Treasuries, during their latest intervention.

Japan’s foreign currency reserves stood at US$1.17 trillion at the end of April, before falling to US$1.09 trillion a month later.

How effective is currency intervention?

Intervention is a way for the government to signal that they will not tolerate excessive currency moves and to deter speculators from pushing a currency into free fall or a rapid surge. However, the impact is often only temporary unless any economic fundamentals driving the trend are also addressed. 

Foreign reserves are generally there to protect the economy during major financial shocks or an unexpected event, not to persistently prop up the currency. A unilateral move is unlikely to reverse broader market trends, although it can buy time until market dynamics change. 

When authorities intervened on Apr 30 – and potentially in the days that followed – the effect was immediate and pronounced. The yen strengthened sharply against the dollar, but the rally soon faded.

By early June, the currency had once again weakened to around 160 per dollar, underscoring the limits of intervention when economic fundamentals remain unchanged.

How often does Japan intervene in its currency market?

Japan has spent heavily in currency markets over the years. While interventions were historically aimed at weakening the yen, more recent efforts have been in the opposite direction.

In 2024, the government spent almost US$100 billion on yen-buying to prop up the currency. On each of the four occasions that year, the exchange rate was around 160 yen per dollar, reinforcing that level as a key threshold for intervention.

To keep traders guessing, officials often don’t immediately confirm that they’ve intervened. The Finance Ministry instead discloses the amount spent on intervention at the end of each month. Generating doubt and fear of losses in the market is part of the government’s strategy, making comments from officials especially powerful. 

What is verbal intervention?

To slow market movements, senior officials can make remarks that hint at potential intervention and warn speculators of losses. Comments by the finance minister or the ministry’s top currency official can quickly rattle markets.

Officials typically use a carefully calibrated set of expressions to ratchet up their warnings and show how close they are to moving. References to “taking action” suggest intervention is close.

What are the flow-on effects of monetary intervention?

When Japan’s authorities intervene in currency markets, the immediate impact is typically sharp. Past episodes show the yen strengthening by around two yen against the dollar within seconds and four to five yen within hours.

These abrupt swings can cause huge losses for traders making speculative bets that the currency will keep moving in the previous direction. Sharp moves can also cause headaches for businesses trying to price goods, make payments and hedge against exchange-rate fluctuations. 

For the government, intervention also carries political and diplomatic risks. It can draw criticism for currency manipulation, especially when intervention is aimed at weakening the yen, a direction that can help exporters with trade. That charge is harder to argue when the government acts to support the yen.

What is the US’ stance on a weak yen?

US officials are sensitive about too much yen weakness. In January, the Federal Reserve Bank of New York contacted financial institutions on behalf of the US Treasury to ask about the dollar-yen’s exchange rate, a move that subsequently triggered a sharp rebound in the currency. 

Trump has long accused Japan of guiding the yen lower to gain a trade advantage. In March last year, he took a more confrontational stance, suggesting tariffs on Japanese goods as a response. While Japan is on the Treasury’s “monitoring list” for foreign-exchange practices, it doesn’t meet all the criteria to be labelled a currency manipulator.

In September, the US and Japan issued a joint statement stating that any intervention should be limited to addressing excessive volatility or disorderly market moves, and not to secure a competitive edge.

In practice, that framework gives Japan some room to act if needed. Any such move, however, would typically be communicated to US authorities in advance and, if aimed at strengthening the currency, would likely be quietly welcomed by Washington.

Still, US Treasury Secretary Scott Bessent recently made clear his preferred solution, hinting that BOJ should be allowed to raise rates and let the yen reach an appropriate level. BLOOMBERG