TOKYO - The yen weakened beyond 163 to the dollar as fears of a further deterioration in the Middle East fueled safe-haven demand for the U.S. currency, pushing Japan's currency to its lowest level in about 39 and a half years.
The yen's fall marked its weakest point since December 1986, when the currency was rapidly appreciating following the Plaza Accord.
Demand for dollars intensified as the United States carried out attacks on Iran for a 10th consecutive day, heightening concerns that the conflict could escalate further.
The decline has erased the effects of the Japanese government's recent intervention in the foreign exchange market. The government and the Bank of Japan spent about 11.7 trillion yen between late April and May to buy yen after the currency weakened into the upper 160 range against the dollar.
Despite the scale of the intervention, the yen returned beyond 160 in less than a month and has now fallen below its pre-intervention level.
Market participants said the yen's weakness reflects a growing divergence between the monetary policies of the United States and Japan. The Federal Reserve is increasingly viewed as hawkish as policymakers focus on bringing U.S. inflation, currently around 4%, back to the central bank's 2% target.
The new Federal Reserve chair has pledged in strong terms to achieve the inflation target, reinforcing expectations that U.S. interest rates will remain elevated or rise further. Even officials previously regarded as dovish have found it difficult to advocate rate cuts under current inflationary conditions.
The Bank of Japan, by contrast, is expected to raise rates only gradually. Two recently appointed policy board members are regarded as reflationists who favor fiscal expansion and a more accommodative monetary stance, with one of them casting the sole vote against the BOJ's latest rate increase.
Two of the board's most hawkish members, Hajime Takata and Naoki Tamura, are scheduled to complete their terms in July 2027. Their eventual replacements could make the board more dovish if the administration continues to favor policymakers reluctant to accelerate rate increases.
Market pricing based on overnight index swaps suggests the BOJ may raise rates one more time this year, while the Federal Reserve is expected to deliver the equivalent of about 1.4 additional increases. Japan's policy rate stands at 1%, compared with 3.75% in the United States.
The outlook has undermined earlier expectations that a narrowing U.S.-Japan interest rate gap would support the yen. Instead, the gap could widen, while other central banks have also continued to raise rates, leaving Japan increasingly isolated.
The yen has weakened against currencies across Europe, Asia and the Americas over the past year. Turkey is one of the few countries against which the yen has not lost ground, despite Turkish consumer prices rising by about 30% annually.
The government could again intervene to support the currency, but market analysts said officials face growing pressure to ensure that any new action has a lasting effect. Another intervention followed by a rapid rebound in the dollar could convince traders that official yen-buying is ineffective.
Japan also intervened in 2022 and 2024. Intervention totaling about 9 trillion yen in 2022 and roughly 13.5 trillion yen in 2024 produced more visible declines in the dollar than the latest operation.
Analysts said intervention can slow the yen's decline but is unlikely to reverse the trend without a change in underlying monetary policy. As a result, traders may continue buying dollars when the exchange rate temporarily falls, viewing official intervention primarily as a measure that delays rather than prevents further yen weakness.
Source: 日経CNBC 公式チャンネル
