The yen has slipped to a 40-year low against the US dollar, with market attention focused on potential intervention by the Japanese government to support the weakening currency. Analysts suggest that this Friday, coinciding with the US Independence Day holiday, could be the optimal timing for action. Historically, the Japanese government prefers to act during windows that maximize intervention effectiveness. With US stock markets closed and fewer bank traders active during the holiday, market liquidity is relatively lower, allowing authorities to achieve greater impact with less capital.
Further analysis indicates that acting this Friday would allow Japan to avoid two significant events that could boost the dollar: the Federal Reserve Chair's speech and the release of US non-farm payroll data. This would mitigate the impact of hawkish news on the intervention's effectiveness. The current yen level has touched its lowest point since 1986, approaching the lows formed after the signing of the Plaza Accord, which aimed to depreciate the dollar to alleviate the expanding US trade deficit.
Authorities have repeatedly emphasized that the continuous depreciation of the yen is driving up import costs and living expenses for residents. To alleviate this pressure, the Japanese government has had to implement subsidy measures to reduce burdens on businesses and households, but this has further exacerbated market concerns regarding Japan's fiscal spending. Statistics show Japan holds approximately $1.1 trillion in foreign exchange reserves. The market expects that if Japan implements currency intervention, the scale of yen purchases will likely not exceed one-third of the total reserves; otherwise, the market might perceive the intervention as too aggressive, thereby undermining policy credibility.
There are also warnings that continuous intervention exceeding three days could affect the International Monetary Fund's classification of the yen's exchange rate regime. In such a case, the yen could be downgraded from a free-floating exchange rate to a managed float, subsequently affecting Japan's credibility and credit rating as a reserve currency issuer. Nevertheless, authorities are well aware that intervention measures can at most slow the pace of depreciation rather than reverse long-term trends. Historical experience shows that Japan successfully prompted a brief yen rebound in August 2024, but the upward trend lasted only a few weeks. At that time, the Federal Reserve subsequently launched an interest rate cut cycle, providing additional support for the yen.
Market analysts note that the widening interest rate differential between the US and Japan remains the fundamental reason suppressing the yen. This issue has been further exacerbated, especially after the Federal Reserve Chair recently released more hawkish signals. The Bank of Japan remains relatively slow in responding to inflation; although recently continuing to raise interest rates, Japan's interest rate level remains significantly lower than that of the US. The interest rate differential advantage continues to drive investors to borrow low-yielding yen and buy high-yield US dollar assets, thereby intensifying yen depreciation pressure.
Despite cautious short-term views, some forecasts suggest that by the end of this year, the USD/JPY exchange rate will fall back to around 158, implying the yen still has about 2% appreciation space compared to current levels. Meanwhile, pricing in the foreign exchange options market shows that the market currently expects the probability of the yen falling further to 165 per dollar remains as high as 37%, reflecting investors' continued pessimism regarding the yen's short-term trend. During Tuesday's trading session, the USD/JPY once rose to 162.38. The yen has cumulatively fallen 3.23% in the first half of this year, with a cumulative drop of about 13% over the past year.
