Yen under pressure; markets focus on monetary policy in Tokyo and Washington

Japan's currency, the yen, is once again in the spotlight on financial markets. After a massive intervention by Japanese and American authorities in late July that temporarily halted the yen's depreciation, the Japanese currency has returned to near the 160-unit/dollar threshold, a development that shows how difficult it is for Tokyo officials to contain the downward pressures on the yen.

Yesterday, the yen was trading around 159 units/dollar, after the US-Japan intervention had temporarily taken it from around 164 to 155 units/dollar.

The currency appreciated slightly yesterday as investors reduced their bets on further interest rate hikes by the US Federal Reserve (Fed), according to Reuters.

• Tokyo-US intervention

The authorities in Tokyo intervened in late July to limit the depreciation of the yen. The intervention, coordinated with Washington, led to a rapid appreciation of the Japanese currency. The yen thus recovered a significant part of its previous losses.

However, the effects of the US-Japan intervention on the foreign exchange market have begun to fade, a sign that there are growing expectations that the central bank in Tokyo will join the efforts to support the currency - a measure that US Treasury Secretary Scott Bessent has suggested would be necessary.

According to fortune.com, some notes by Scott Bessent suggest that the US bought yen worth 5-10 billion dollars, while Japan's intervention exceeded 50 billion dollars.

According to analysts, the intervention on the foreign exchange market may temporarily change the relationship between supply and demand, but does not eliminate the reasons why investors prefer the dollar.

One of the main explanations is the difference between interest rates in the United States and Japan. Even as the Bank of Japan has begun the process of normalizing monetary policy, Japan's benchmark interest rate is around 1%, and the yields offered by American assets remain attractive.

This difference fuels what markets call the "carry trade”: investors can borrow in yen at relatively low costs and put the money in assets denominated in higher-yielding currencies, including dollars.

According to Fortune, efforts to support the yen have been seen as short-term measures that address the "symptoms” rather than the root causes of the weakening Japanese currency. These include Japan's massive debt, which exceeds 200% of GDP, fiscal stimulus that is expected to worsen the deficit, and a central bank that has been slow to raise interest rates amid high inflation.

Markets are currently pricing in a 65% chance of a 25 basis point increase in the Bank of Japan's interest rate in September and a 40 basis point increase by the end of the year, CNBC notes.

• The 160 yen/dollar threshold is on the market's radar

The 160 yen/dollar level has become an important psychological and political threshold. Its breach in the direction of a new depreciation could lead investors to wonder whether the Japanese authorities will intervene again.

However, the market no longer sees intervention as a definitive solution. If the difference between Japanese and American interest rates remains large enough, investors may quickly return to positions that favor the dollar, the international press writes.

• Japanese economy - progress below expectations

Official data published yesterday offers a contradictory picture. According to them, Japan's economy grew by just 1.1% in the second quarter of 2026, at an annual rate, below analysts' expectations (2%). Private consumption and business investment fell, indicating problems in domestic demand.

For the Bank of Japan, the situation is delicate, analysts say. An interest rate hike could support the yen, as it would reduce the spread with yields in the United States. At the same time, however, higher interest rates could put even more pressure on an economy that is already showing signs of slowing.

Inflationary pressures further complicate the situation. A weak yen makes imports more expensive, especially energy and raw materials, which can affect the purchasing power of households.

• The Weak Yen Paradox

For large exporters, a weaker yen is not necessarily bad news. Revenues earned abroad are converted into more yen when the Japanese currency is weak. Automakers and technology companies can therefore benefit from the exchange rate.

For households, however, the situation is different. Japan imports a large part of the energy and raw materials it needs. A weaker yen therefore means higher import costs and additional pressure on prices.

Official data for the second quarter already shows this tension: private consumption fell, while exports provided a modest boost to the economy.

• Japanese bond yields rise

One aspect to consider in the current situation is the evolution of the Japanese bond market. The yield on ten-year Japanese government bonds has risen to around 2.93%, the highest level in three decades. The increase in yields indicates that investors anticipate a more restrictive monetary policy and, implicitly, the possibility of another interest rate hike by the Bank of Japan.

Thus, the contradiction arises: on the one hand, the yen remains weak; on the other hand, the bond market is giving signals that Japanese monetary policy could become more restrictive.

• What's next for the yen?

The direction of the yen will depend largely on the policy of the Bank of Japan and that of the Federal Reserve. If the Bank of Japan raises interest rates in September or sends a clear message about continuing monetary normalization, the pressure on the yen could decrease. On the other hand, if the central bank hesitates due to the slowdown in the economy, the yield differential with the United States could continue to favor the dollar.

According to sources cited by Bloomberg, the Bank of Japan is expected to raise monetary policy rates either in September, at its next meeting, or in October. Bloomberg reports that the government led by Prime Minister Sanae Takaichi supports the Bank of Japan's decision to raise interest rates in the near future.

On the American side, any signal regarding the Fed's interest rate cut could have the opposite effect. Investors have already sharply reduced their expectations for a US interest rate hike in September, and this change contributed to the appreciation of the yen yesterday.

In this context, the 160 yen to the dollar threshold remains one of the most important levels followed by the market.

• Yen depreciation is not just a Japanese problem

The weakening yen is not just a problem for Japan, according to analysts. A sudden change in the currency's direction could have effects on global markets, especially if it causes the rapid closure of "carry trade" positions.

Investors who borrowed yen to buy riskier assets may have to close their positions in a short time if the yen starts to appreciate sharply. Such a process can amplify volatility in stock and bond markets.

A new currency intervention, an interest rate hike by the Bank of Japan or a change in Fed policy could significantly influence the dynamics of the yen, analysts say.