Why the Yen Is So Weak and What That Means for Japan: QuickTake

The yen continues to languish near its lowest level against the dollar since 1986, mainly because interest rates in Japan remain much lower than those in the US and elsewhere, diminishing the currency’s relative allure. After several failed efforts by Japanese officials to talk the yen higher, the government moved more decisively as the yen breached the 160 level versus the dollar in late April, conducting its biggest ever intervention. Without specifying the precise timing, the finance ministry said it spent ¥9.8 trillion ($60.7 billion) to support Japan’s currency.

The yen has been the worst performer against the dollar this year among major currencies, falling about 13%. That’s mainly because of the wide gap in interest rates between Japan and the US. Even after the first interest rate hike in 17 years, Japan’s new policy setting is by far the lowest in the developed world, at a range of between 0% and 0.1%. Federal Reserve officials have kept the US benchmark federal funds rate in a range of 5.25% to 5.5%. That’s a major gap favoring investments in the US and therefore the dollar. The gap is likely to stay intact longer than previously expected because the Fed has been cautious about premature rate cuts even as the US labor market shows signs of cooling.