Over the past several weeks, the yen has returned to the forefront of global currency markets news after Japanese authorities, with support from the U.S., intervened to arrest a renewed slide in the currency. The move came after the yen weakened toward roughly ¥164 per dollar, its lowest level in decades, before coordinated yen-buying helped push the currency back toward its strongest level in about three months. The size and coordination of the intervention sent a clear message that policymakers are uncomfortable with the speed and scale of yen depreciation. But while the action may have temporarily disrupted positioning and forced some short-term yen strength, it does not address the deeper forces that have been driving the currency lower in the first place.
The central problem remains the wide gap between Japan’s policy settings and those of the rest of the developed world, particularly the U.S. Even after the Bank of Japan began moving away from ultra-easy policy, Japanese interest rates remain far below U.S. rates, leaving the yen exposed as a funding currency for global carry trades. That interest-rate differential encourages investors to borrow in yen and allocate capital into higher-yielding markets, creating a persistent source of selling pressure on the currency. Even with the sharp move higher in Japanese government bond yields, the rate gap versus the U.S. remains wide across the curve, leaving the yen structurally exposed as a funding currency for carry trades, as shown in Exhibit 1. Intervention can disrupt that trade temporarily by forcing short-covering and raising the cost of speculation, but it does not remove the underlying incentive to fund in yen as long as Japanese yields remain structurally low.
Exhibit 1. U.S. Treasury yields remain well above Japanese government bond yields across the curve.
Source: Bloomberg
The reason those yields remain low is that the Bank of Japan has limited room to tighten aggressively. Japan’s economy remains fragile, with weaker external demand, pressure on households from higher import costs, and a government debt burden that makes a disorderly rise in long-duration Japanese government bond (JGB) yields difficult to tolerate. The BOJ has begun reducing its outright purchases of JGBs, but the process remains gradual, and the Bank has preserved the option to increase purchases or conduct fixed-rate operations if long-term yields rise too quickly. That continued support helps prevent Japanese yields from fully adjusting to inflation, fiscal risk, and currency weakness, thereby preserving the rate differential that keeps the carry trade alive.
The recent spike in oil prices adds another layer to this constraint. Japan’s trade balance has already moved back into deficit, with the deficit reaching ¥406.9 billion in June compared with a surplus of ¥122 billion a year earlier, as imports rose sharply on the back of higher oil prices and a weaker yen.1 Japan’s trade position has also turned less supportive, with the balance moving back into deficit in May and June as higher oil prices and a weaker yen lifted import costs, as shown in Exhibit 2. This matters because Japan imports nearly all of its crude oil, meaning higher energy prices quickly translate into a larger import bill and a direct hit to domestic purchasing power. BOJ Governor Kazuo Ueda has described this dynamic clearly, noting that for a commodity-importing economy like Japan, higher crude oil prices deteriorate the terms of trade by increasing the outflow of income overseas and placing downward pressure on the economy.2 BOJ Board Member Junko Koeda has made a similar point, arguing that soaring crude oil and food prices have driven up import prices and worsened Japan’s terms of trade.3 In other words, the oil shock is not simply an inflation problem for Japan; it is a real-income shock that weakens demand, squeezes households, and makes it even harder for the BOJ to tighten policy aggressively in defense of the currency.
The U.S. Treasury market adds another complication. Japan remains one of the largest foreign holders of U.S. government debt, while the U.S. is running large fiscal deficits and remains dependent on foreign demand to absorb heavy Treasury issuance. That makes large-scale Japanese Treasury sales to fund yen support uncomfortable for Washington, because they could add pressure to a Treasury market already managing significant supply. Expanded repo facilities may reduce the immediate need for outright Treasury sales by allowing Japan to borrow dollars against its holdings, but that is a liquidity bridge rather than a long-term solution. It does not change the underlying imbalance: Japan still needs low domestic yields, the U.S. still needs foreign demand for Treasuries, and the yen carry trade remains supported by the policy gap between the two.
This is why intervention is unlikely to provide a durable solution. It can bend the hose for a period of time by slowing the flow of yen selling, disrupting positioning, and signaling official discomfort with disorderly currency moves. But it does not turn off the water. As long as Japan’s economy remains too fragile for aggressive tightening, the BOJ continues to support the JGB market, oil prices pressure real incomes, and the U.S. fiscal imbalance leaves the Treasury market dependent on stable foreign demand, the structural forces behind yen weakness remain in place. That matters not only for the yen, but for financial markets more broadly. The yen carry trade has become deeply embedded in global risk-taking, and a disorderly unwind could quickly spill over into rates, equities, credit, and broader liquidity conditions. In that sense, failed intervention would not simply represent a currency-market problem; it would increase the risk of wider financial-market volatility at a time when policy flexibility is already constrained on both sides of the Pacific.
As always, stay tuned.
Ardavan Mobasheri
Chief Economist
1. AP News, “Japan’s exports and imports grow as yen weakens,” July 23, 2026. The article cites Ministry of Finance data showing a ¥406.9 billion June trade deficit, versus a ¥122 billion surplus a year earlier, and notes that higher oil prices and a weaker yen raised import costs.
2. Bank of Japan, Kazuo Ueda, “Speech by Governor Ueda at the Kisaragi-kai Meeting in Tokyo,” June 3, 2026. Ueda stated that, for a commodity-importing economy like Japan, higher crude oil prices deteriorate the terms of trade by increasing the outflow of income overseas and placing downward pressure on the economy.
3. Bank of Japan, Junko Koeda, “Economic Activity, Prices, and Monetary Policy in Japan,” speech at a meeting with local leaders in Fukuoka, May 21, 2026. Koeda noted that soaring crude oil and food prices drove up import prices and contributed to a deterioration in Japan’s terms of trade.