The yen weakened to 162.40 against the US dollar in Tokyo trading on Tuesday, its lowest level since December 1986, breaching the previous trough of 161.95 set in July 2024. The move extends a depreciation that has seen the currency lose nearly 30% of its value since early 2022, driven by a persistent divergence in monetary policy between the Bank of Japan and the US Federal Reserve.

The core mechanism remains the wide interest rate gap. Although the BOJ raised its benchmark rate to 1% on 16 June—its highest since 1995—real rates, adjusted for inflation, remain deeply negative. Markets anticipate the Fed will raise rates further this year, with traders pricing a 63% chance of a hike by September, according to CME data cited by analysts in Singapore. This differential fuels the carry trade: investors borrow cheaply in yen to invest in higher-yielding dollar assets, generating steady capital outflows that weigh on the currency. Structural factors amplify the pressure. Japan’s heavy reliance on energy imports, priced in dollars, forces domestic buyers to sell yen as oil prices rise amid Middle East tensions. Meanwhile, tax-advantaged Nisa accounts encourage households to shift savings into foreign assets.

The depreciation presents a dual-edged sword for the world’s fourth-largest economy. Exporters and the Nikkei 225, which rose 0.85% on Tuesday, benefit from improved competitiveness, but import costs for food, fuel and raw materials have surged, stoking inflation and eroding household purchasing power. The political cost is mounting for Prime Minister Sanae Takaichi’s administration, which faces public discontent over rising living costs. Finance Minister Satsuki Katayama stated that Japan and the US are prepared to take “decisive measures” after an online meeting with Treasury Secretary Scott Bessent, but market participants in Tokyo and London view verbal warnings as insufficient to reverse the trend. An asset manager quoted by Jiji Press noted that intervention would not alter the fundamental direction.

The immediate focus shifts to Thursday’s US jobs report for June. A strong payroll number would reinforce hawkish Fed expectations and could push the yen further, testing Tokyo’s resolve. Any intervention, analysts caution, would likely only slow the depreciation unless the interest rate gap begins to narrow. The Ministry of Finance’s record ¥11.73 trillion intervention in April–May 2026 provided only temporary relief, and the yen has since resumed its slide. The next milestone is whether Japanese authorities move from rhetoric to action if the currency approaches the 163 level.