The Japanese yen is closing in on its weakest level since 1986, even as the Bank of Japan raised its policy rate to 1% — a 31-year high — and jointly intervened in the foreign exchange market with the Ministry of Finance, using a record ¥11.7 trillion. Yet the depreciation trend remains stubbornly unbroken, exposing deep structural constraints in Japan's monetary policy.
Analysts point to the widening US-Japan interest rate differential as the crux of the problem. The short-term spread has reached 263 basis points, providing ample fuel for large-scale carry trades. At the same time, Japan's massive public debt severely limits the BOJ's room to raise rates further, preventing a more forceful monetary tightening to support the yen. Meanwhile, the Federal Reserve's hawkish stance, combined with geopolitical risks and energy price volatility, has intensified Japan's imported inflation and reinforced market expectations of yen depreciation.
This situation underscores how Japan's monetary policy autonomy has become deeply entangled with the US interest rate cycle. Even with a rate hike and unprecedented intervention, the BOJ and the Ministry of Finance cannot single-handedly reverse the currency's trajectory. The yen's future path will remain highly dependent on the degree of policy divergence between the US and Japan, as well as shifts in the global economic landscape.