[TMGM Financial Breakfast] Yen Breaks Above 163, Hits 40-Year Low. Markets Believe It Could Fall to 180

The Japanese yen has depreciated by approximately 3.9% against the U.S. dollar so far this year. Between late April and early May, the Japanese government spent a record JPY 11.73 trillion (approximately USD 73.5 billion) on foreign exchange intervention. In June, the Bank of Japan raised its policy rate from 0.75% to 1.0%, the highest level in 31 years. Despite both rate hikes and massive intervention, the yen has still weakened to 163. The market is now focused on two key questions: Will Japan intervene again? And if it does, will it actually work?

Japan's Intervention Strategy May Be Changing

Former Bank of Japan Policy Board member Sayuri Shirai warned that if the Federal Reserve delivers additional rate hikes, USD/JPY could even climb toward 165. Market participants generally believe the Japanese authorities have less room to tolerate further sharp depreciation of the yen. Japanese officials have also made their stance clear. Finance Minister Katsuyuki Katayama has repeatedly stated that the government stands ready to take appropriate action against excessive currency volatility.

However, this round of intervention may look very different from previous ones. An exclusive Reuters report published in early July revealed that Japan's Ministry of Finance is abandoning its traditional practice of signaling intervention in advance and instead shifting toward a "surprise intervention" strategy.

Previously, Japanese authorities typically issued verbal warnings before intervening, with officials saying they were "closely monitoring exchange rate movements" or that they would "not rule out any options," giving traders time to unwind positions. According to sources familiar with the matter, however, the Ministry of Finance now intends to avoid hinting at any specific exchange-rate threshold that could trigger intervention. Instead, the deciding factor will be the buildup of speculative short yen positions rather than the exchange rate crossing a publicly known level.

This means that if Japan intervenes again, it will likely enter the market when traders least expect it. During the U.S. Independence Day holiday on July 3, when U.S. markets were closed, many viewed it as a potential intervention window. Now that USD/JPY has broken above 163, the probability of intervention has only increased.

Some market participants believe that if coordinated intervention between Japan and other major economies were to take place, the decline in USD/JPY could significantly exceed the typical 5% correction seen during previous unilateral interventions. However, coordinated intervention would require U.S. cooperation. With U.S. inflation still elevated and the Federal Reserve maintaining a hawkish stance, whether Washington would be willing to support Japan in stabilizing the yen remains a major uncertainty.

Intervention Cannot Solve the Root Problem

What is the fundamental reason behind the yen's persistent weakness? It is the interest rate differential of more than 250 basis points between the United States and Japan. The Federal Reserve's federal funds rate stands at 3.50% to 3.75%, while the Bank of Japan's policy rate is only 1.0%. Investors can borrow yen at extremely low costs and invest in higher-yielding U.S. assets. As long as the mathematics behind the carry trade remain unchanged, the yen will continue to face structural selling pressure.

Christy Tan, Global Investment Strategist at Franklin Templeton Institute, summarized it well: "Intervention can slow the pace of depreciation, punish excessive speculation, and signal official dissatisfaction, but it cannot change the underlying mathematics."

There is broad consensus across the market that Japan's currency intervention will only become truly effective when major central banks such as the Federal Reserve and the European Central Bank begin shifting from tightening toward rate cuts, while the Bank of Japan accelerates its own rate hikes and ends government bond purchases. In other words, intervention may slow the pace of depreciation, but it cannot reverse the underlying trend. That trend is ultimately determined by the Federal Reserve, not Japan's Ministry of Finance.

The Bank of Japan also faces a fundamental dilemma. Government debt has expanded to around 240% of GDP, one of the highest levels among developed economies. Raising interest rates further would increase the government's debt-servicing burden and weigh on economic growth, while slowing the pace of rate hikes would do little to halt the yen's depreciation. Li Qingru, a researcher at the Chinese Academy of Social Sciences' Institute of Japanese Studies, described the situation as follows: "The Japanese government is trapped between stabilizing the exchange rate, maintaining fiscal sustainability, and controlling inflation."

Mizuho Bank believes the yen could weaken to 170, while Sumitomo Mitsui Financial Group expects it could fall to 180 over the coming years. Whether these forecasts ultimately prove accurate is less important than what they represent: a growing consensus that the yen's depreciation is not yet over.

Overall, Japan is highly likely to intervene again. With 163 already breached, 165 may not be far away. However, the effectiveness of the next intervention is unlikely to be much greater than the previous USD 73.5 billion operation. As long as the U.S.-Japan interest rate differential remains above 250 basis points and carry trades continue to offer attractive returns, the yen will remain under persistent structural selling pressure. Intervention can only reduce the speed of the decline—it cannot change its direction.