Japan’s yen is resembling a slow-motion train wreck as it remains stuck near 40-year lows, and there could be even more downside ahead.
On Monday, the yen was down 0.58% at 162.30 per dollar. It’s fallen 3.6% so far in 2026 and nearly 11% from a year ago.
Some of the more recent triggers include fears that Japan is lagging on efforts to fight inflation after the oil shock from the Iran war. While the Bank of Japan has hiked rates, more aggressive tightening may be necessary.
At the same time, other central banks are poised to get tougher, such as the Federal Reserve, making Japan’s policy and currency weaker by comparison.
Prime Minister Sanae Takaichi’s plans for more deficit spending, which would stoke inflation further, are adding to downward pressure on the yen.
But Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, has been sounding the alarm on the yen for a while and points to Japan’s massive debt, which has ballooned to 240% of GDP.
In his view, the Bank of Japan is suppressing bond yields to prevent interest costs on the debt pile from becoming unmanageable. In the process, it also obscures the debt-crisis risk that would otherwise be manifested in higher yields.
“That puts depreciation pressure on the yen, since investors have little incentive to stay in Japan,” Brooks explained in a Substack post last week.
While a weak yen can aid Japan’s exports, it risks friction with trading partners like the U.S., especially as the Trump administration seeks to shrink the trade deficit. A cheap yen also exacerbates inflation by making imports more expensive, and the country relies heavily on overseas energy.
To prevent precipitous yen depreciation, Tokyo has periodically intervened in markets and spent tens of billions of dollars to shore up the currency in April and May.
But that has failed to halt the yen’s slide, and so-called verbal intervention from Japan’s chief cabinet secretary, who said last week that the government “stands ready to take action whenever necessary,” also fell flat.
Brooks warned Japan’s intervention is “doomed to fail because it treats the symptom (yen depreciation) and not the disease (too much debt).”
“In fact, it’s my view that FX intervention is deeply counterproductive because it creates the illusion that nothing’s wrong when—actually—there’s a very serious crisis brewing,” he added.
For now, markets are misinterpreting the yen’s quiet implosion as gradual weakening that’s being managed in a controlled fashion as the constant threat of intervention holds off steeper declines, Brooks argued.
The surface-level appearance of calm, however, is misleading and unsustainable as recent currency interventions have proven less and less effective, he warned.
“There’ll come a point when markets will just ignore intervention,” Brooks predicted.
As long as the Bank of Japan continues to prevent bond yields from expressing the country’s true debt risk, the yen will face depreciation pressure and intervention will be increasingly useless, he said, adding that the yen will eventually sink to 170 per dollar.
In contrast to the yen, Japan’s Nikkei 225 stock index is on fire and has soared 38.5% so far this year, while the S&P 500 is up 10%.
Such a rally would typically translate to more demand for the yen as investors rush into Japanese stocks. But traders have been engaged in significant currency hedging, putting downward pressure on the yen, according to the Financial Times.
The result is that Tokyo appears stuck, staying the course on a policy that isn’t working.
“The Japanese probably realize that FX intervention at the moment is an exercise in futility,” Chris Turner, ING’s global head of markets research, told the FT. “But they don’t want to leave yen losses unchecked in case it triggers a ‘sell Japan’ mindset should Japanese government bonds and then equities come under pressure, too.”
Japan’s yen is currently facing significant challenges, resembling a slow-motion train wreck as it hovers near 40-year lows. As of Monday, the yen was trading at 162.30 per dollar, marking a 3.6% decline since the beginning of 2026 and nearly an 11% drop from the previous year. Recent developments have intensified concerns about the yen’s future, particularly fears that Japan is lagging in its efforts to combat inflation, especially following the oil shock caused by the ongoing Iran war. Although the Bank of Japan (BoJ) has raised interest rates, analysts suggest that more aggressive monetary tightening may be necessary to stabilize the currency.
One of the key factors contributing to the yen’s decline is the contrasting monetary policies of global central banks. While the Federal Reserve and other central banks are poised to adopt stricter monetary policies, Japan’s approach appears softer, further weakening the yen’s position. Additionally, Prime Minister Sanae Takaichi’s plans for increased deficit spending, aimed at stimulating the economy, are likely to exacerbate inflationary pressures, thereby putting further downward pressure on the currency.
Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, has long been sounding the alarm about the yen’s precarious situation. He highlights Japan’s staggering debt, which has surged to 240% of GDP. Brooks argues that the BoJ is intentionally suppressing bond yields to manage the interest costs associated with this massive debt load. This strategy, however, obscures the underlying risk of a debt crisis, which would typically manifest in higher yields. Brooks explains that such conditions deter investors from maintaining their presence in Japan, leading to depreciation pressure on the yen.
While a weaker yen can provide a boost to Japan’s exports, it also risks creating friction with trading partners, particularly the U.S., which may seek to address trade imbalances. Furthermore, a cheaper yen exacerbates inflation by increasing the cost of imports, a significant concern for Japan, which heavily relies on foreign energy sources. In an attempt to stabilize the currency, Tokyo has intervened in the foreign exchange markets, spending tens of billions of dollars to support the yen in April and May. However, these efforts have been largely ineffective, and verbal interventions from officials, including statements from Japan’s chief cabinet secretary about readiness to act, have failed to halt the yen’s decline.
Brooks cautions that Japan’s intervention strategies are « doomed to fail » because they address the symptom of depreciation rather than the underlying issue of excessive debt. He argues that such interventions create a false sense of security, masking the serious crisis brewing beneath the surface. The current misinterpretation of the yen’s gradual decline as a controlled weakening is misleading and unsustainable. In Brooks’ view, there may come a time when markets disregard intervention efforts altogether, leading to a more pronounced decline in the yen, potentially reaching levels as low as 170 per dollar.
In contrast to the yen’s struggles, Japan’s Nikkei 225 stock index has performed exceptionally well, soaring 38.5% in 2023, compared to a 10% increase in the S&P 500. Typically, such a rally would lead to increased demand for the yen as investors flock to Japanese equities. However, the reality has been different, as traders have engaged in significant currency hedging, which puts additional downward pressure on the yen. This situation leaves Tokyo in a challenging position, unable to shift away from a policy that is not yielding the desired results.
According to Chris Turner, ING’s global head of markets research, the Japanese authorities likely recognize that foreign exchange intervention is largely futile at this juncture. However, they are hesitant to allow the yen to depreciate unchecked, fearing it might trigger a broader sell-off of Japanese assets, including government bonds and equities. This reluctance to accept the yen’s decline while simultaneously acknowledging the ineffectiveness of current policies underscores the complex dynamics at play in Japan’s economic landscape.
In summary, the yen’s ongoing struggles reflect a confluence of factors, including Japan’s massive debt burden, contrasting monetary policies with other nations, and the potential consequences of government spending plans. As the situation unfolds, the effectiveness of Japan’s intervention strategies remains in question, and analysts warn that without addressing the underlying issues, the yen’s decline may continue unabated, with significant implications for the broader Japanese economy and its trading relationships.
