The yen nears Japan's line in the sand

The dollar climbed steadily towards 158 yen, pushing the currency close to the level the Ministry of Finance is widely believed to defend. The speed of the fall has put Japan's currency officials on the verge of intervening directly in the market. Tokyo has been here twice in four years, and on both occasions it ended up spending reserves.

Two recent rounds of dollar selling

In September 2022 Japan bought yen for the first time since 1998, and it acted again in October of that year. In 2024 the ministry sold dollars after the currency passed 160 in late April, and once more in July. Each time the yen jumped several figures within minutes and then drifted back over the following weeks, because nothing had changed in the reasons investors had for borrowing yen and buying dollars. Officials do not publish a target, but the market has learned to read the escalating language from the vice-minister for international affairs, and the rate checks in which the central bank asks dealers for quotes, as the last warnings before action.

The sums involved were large. The operations in the spring of 2024 were the biggest monthly intervention Japan had ever recorded, and the July round added substantially more. The ministry publishes its totals only at the end of each month, and the daily breakdown only once a quarter, so traders spend the days after a suspected intervention comparing the Bank of Japan's account projections with actual money-market flows to confirm what happened.

Speed matters more than level

Japanese officials care less about where the yen trades than about how fast it gets there. A speculative drop of three to four yen in forty-eight hours upsets importers' planning and pushes up the price of imported goods on Japanese shelves. When speculation runs ahead of the economic case, the Ministry of Finance tells the Bank of Japan to sell dollars, usually without warning. The distinction matters diplomatically as well, since the Group of Seven accepts intervention against disorderly moves far more readily than a defence of any particular level.

Who gains from a cheap yen

The weak currency splits the country. Exporters such as carmakers and machinery firms book their foreign earnings at a flattering rate, and the Nikkei has been buoyed by those translated profits. Households pay for it: Japan imports most of its energy and much of its food, both priced in dollars, and consumer price inflation has run above the Bank of Japan's 2 per cent target since 2022. That squeeze on real wages is why a sliding yen is a political problem for Sanae Takaichi's government, which took office in October with a promise of fiscal support and has seen long-dated government bond yields climb to their highest in decades.

There are quieter beneficiaries as well. Record numbers of foreign tourists have come to Japan as the cheap yen has made hotels, meals and shopping bargains by international standards, and department stores and regional economies have gained from their spending. Companies with large overseas operations report higher profits in yen without selling a single extra unit. The losers are concentrated among households on fixed incomes, small firms that import raw materials, and anyone who pays for fuel.

Money that keeps leaving

The interest-rate gap is only part of the pressure. Japanese households have been moving savings abroad through the expanded tax-free investment accounts introduced in January 2024, many of which buy global equity funds and therefore sell yen every month. Japanese companies earn large profits overseas and often reinvest them there rather than bringing them home. The country also pays growing sums to foreign technology firms for cloud computing, software and online advertising. These flows are steady and insensitive to intervention, which is why the yen tends to drift weaker again once the ministry stops selling dollars.

Intervention alone will not hold

Intervention without help from monetary policy is expensive and buys only time. Selling dollar reserves to support the yen drains foreign currency holdings and leaves the interest rate gap that drives the selling exactly where it was. The mechanics make the point: the ministry's foreign exchange fund sells dollar deposits and Treasury securities, the yen it receives is withdrawn from the market, and nothing about the carry trade changes while Japanese short-term rates stay below 1 per cent and American ones above 3 per cent. Japan holds more than $1 trillion in reserves, so it cannot easily run out, but each round sets a price that speculators can test again.

What finally worked in 2024

The best precedent favours the sceptics of intervention alone. The yen's slide in 2024 stopped only after the Bank of Japan raised its policy rate at the end of July and weaker American data revived expectations of Federal Reserve cuts. The combination forced a violent unwinding of yen-funded carry trades, and on 5 August the Nikkei suffered its worst day since 1987. Intervention had bought time in the spring, and the rate move did the rest.

When Washington helped

Japan has rarely had American help. The last time the United States joined in buying yen was in June 1998, during the Asian financial crisis, when both governments feared that a collapsing yen would spread turmoil across the region. The Plaza Accord of 1985, in which the leading economies agreed to push the dollar down, remains the model of what coordinated action can achieve, but it depended on a shared view that the dollar was overvalued. American officials today have repeatedly said that they want a stronger yen rather than a weaker one, which makes outright objections to Japanese intervention unlikely, though joint action would still be a large step.

The case against the gloomy view is that the rate gap may narrow without Tokyo doing much at all. If the Fed keeps cutting and the Bank of Japan continues its gradual tightening, the carry trade loses its appeal and a well-timed intervention could look decisive in hindsight. The things to watch are the Bank of Japan's next policy meeting and its guidance on further increases, American inflation and jobs data, and any sign that Washington objects to Japanese dollar sales. With the yen near 158, Tokyo is probably days or weeks from spending reserves on its defence. Unless the Bank of Japan narrows the rate gap, the money will buy a pause and little more.