Yen near four-decade low as analysts question Japan's ability to reverse slide

The Japanese yen remained near a four-decade low against the dollar, and analysts warned that authorities may struggle to reverse the currency's decline.

The yen edged higher Thursday after a report said the Bank of Japan was considering a faster pace of interest rate increases. The move came a day after the currency hit 163.24 to the dollar, its weakest level since December 1986.

Finance Minister Satsuki Katayama has promised decisive action as needed to support the yen. She has suggested several times in recent weeks that officials were ready to intervene in financial markets.

The Bank of Japan is widely expected to leave interest rates unchanged on July 31, after raising them last month to a 31-year high. Most economists have predicted the next increase in December. Bloomberg News reported, however, that policymakers were open to raising rates faster because of the weaker yen's effect on inflation. The consensus among economists has been for an increase about every six months.

The source said high oil prices and concerns over debt were important reasons for the yen's weakness. It also said a key driver was the gap between Bank of Japan interest rates and rates in the United States and other large economies. With investors expecting the US Federal Reserve to raise rates at least once before the end of the year, pressure on the yen has grown.

That rate gap encourages investors to borrow yen cheaply and invest in assets outside Japan that offer better returns, a strategy known as a carry trade. The source said this can lead to capital outflows and further pressure on the yen.

Katayama this month urged Japan's pension funds to increase investment in domestic assets. That briefly supported the yen and eased pressure on bond yields.

Stephen Innes of SPI Asset Management said Japanese authorities could interrupt the currency's fall temporarily but had not convinced markets that the broader direction had changed. He said Japan's policy choices still pointed toward a weaker currency, with the government seeking stronger growth, more investment and continued fiscal support, while the Bank of Japan wants to normalise policy only gradually.

Economists at Standard Chartered said previous Japanese interventions had done little to stop the yen's slide. They said Japan spent 11.7 trillion yen in May, but the yen remained near its weakest level in four decades, showing the limited lasting effect of earlier efforts. Similar interventions in 2024 also had limited effect, they said.

IG analyst Fabien Yip said intervention would remain more of a circuit-breaker than a cure for yen weakness unless it was paired with a genuine shift in Bank of Japan policy.

Lloyd Chan at MUFG said disruption to oil shipments because of the Middle East conflict, along with rising US Treasury yields, could also weigh on other Asian currencies. He said many regional economies, including Japan, Korea, Singapore, the Philippines and Thailand, depend heavily on imported energy, and that prolonged high oil prices and fuel shortage concerns could have significant spillover effects.