Japan’s government battles to support yen amid undervaluation concerns

Japan just pulled out a weapon it hasn’t used in nearly three decades. In late July, Japanese authorities coordinated with the United States on a rare joint intervention in foreign exchange markets, selling approximately $59 billion in US dollars to prop up a yen that had cratered to nearly 164 per dollar. The last time Tokyo and Washington teamed up like this was 1998, when the Asian financial crisis was rearranging the global economic furniture.

The intervention worked, briefly. The yen strengthened to around 157 per dollar before gravity reasserted itself, with the currency drifting back to 158-159 by mid-August. For a $59 billion effort, that’s a sobering reminder of how difficult it is to fight structural currency trends with brute-force market operations.

Why the yen keeps sinking

The yen’s decline is not a mystery. It’s a story about interest rate differentials, and it’s been playing on repeat for years.

While the Federal Reserve has maintained relatively elevated rates, the Bank of Japan has been far more cautious about tightening monetary policy. That gap makes the dollar a more attractive place to park capital and fuels the carry trade, where investors borrow in low-yielding yen to invest in higher-yielding assets elsewhere.

Under Prime Minister Sanae Takaichi, domestic economic policies have added another layer of complexity. Japan’s government faces the perennial balancing act of supporting growth in an economy that has struggled with deflation for decades while also preventing the currency from weakening so much that import costs crush households and businesses.

US Treasury Secretary Scott Bessent framed the joint intervention as an effort to correct what he called the “substantial undervaluation” of the yen.

The intervention playbook

The coordinated action on July 30-31 was notable for both its scale and its symbolism. Japanese Finance Minister Satsuki Katayama stated on August 3 that further joint intervention could occur if necessary.

Bank of America adjusted its year-end 2026 forecast for the yen to 149 per dollar, down from a previous estimate of 152. That forecast factors in both the joint intervention and the possibility of further BOJ rate hikes. If that target materializes, it would represent a roughly 6% appreciation from mid-August levels.

What investors should watch

First, there’s the BOJ’s next move. Governor Kazuo Ueda has signaled willingness to raise rates, but the central bank has a long history of telegraphing hawkish intent and then finding reasons to delay.

For global investors, the yen’s undervaluation has implications beyond Japan. A weaker yen makes Japanese exports more competitive, squeezing manufacturers in South Korea, Germany, and other export-heavy economies. If Bank of America’s forecast is correct, unhedged dollar-based investors in Japanese equities would get a currency tailwind on top of whatever the stock market delivers.

Finance Minister Katayama’s warning that further intervention remains on the table keeps the threat alive. The next few months will test whether Tokyo and Washington are prepared to back words with more billions.

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