Original source: Wall Street Journal

On June 23 during the Asian session, the dollar traded around 161.57 against the yen, just a step away from last week's 161.81 — the weakest yen since December 1986.

Just last Tuesday, the Bank of Japan had raised the policy interest rate to 1%. The highest in 31 years.

In other words: the Bank of Japan did the most hawkish thing it could within its capabilities, yet the yen not only failed to rise but weakened further.

Finance Minister Shunichi Suzuki was so anxious that he directly called U.S. Treasury Secretary Janet Yellen to discuss the exchange rate. Japan intervened in the foreign exchange market with a record 11.7 trillion yen (about 73.7 billion USD) in May. The market is now watching 161.96 — that is the last "defense line" before July 2024. If broken, the next target will be 162.25 from December 1986.

However, the truly dangerous signal is not the price itself, but this time, both the interest rate hike and the intervention defense lines have failed simultaneously.

1% interest rate, 350bp interest rate differential

On June 16, the Bank of Japan raised its policy interest rate from 0.75% to 1%, with a voting result of 7 to 1 — only one member opposed. This was the fifth action since the interest rate hike cycle began in March 2024 and was also the first time Japanese rates reached the 1% mark since 1995.

If you only look at the actions of the Bank of Japan itself, what it is doing is quite aggressive. From -0.1% to 1%, a net increase of 110 basis points within 22 months.

But the problem is: you raise rates, others are also raising, and much faster than you.

The current U.S. federal funds rate is between 3.50% and 3.75%, unchanged from the Federal Reserve's June meeting — but the story behind it is much more dangerous than it appears.

The June dot plot showed that out of 19 FOMC participants, 18 submitted forecasts, with 9 expecting more rate hikes in 2026. Specific distribution: 5 predict two more hikes (25bp each), 1 predicts three more hikes, and 3 predict one. The year-end median rate jumped from 3.4% in March to 3.8%, the most severe single adjustment since the dot plot was introduced in 2012. The U.S. CPI in May recorded a three-year high of 4.2%, while core PCE year-on-year remained around 3%.

Now let's do the math: U.S. rate at 3.63%, Japanese rate at 1.00%. Nominal interest differential of 263 basis points.

But more severe is the long-end differential: the yield on the 10-year U.S. Treasury is about 4.45%, while the yield on the 10-year Japanese government bond is about 2.65% — a difference of about 180 basis points.

In addition, the Bank of Japan continues to purchase bonds (although reducing purchases by 200 billion yen each quarter, it will not completely stop before April 2027), which limits the upward potential of Japanese bond yields. This means that the annualized carry trade return (borrowing yen, buying U.S. Treasuries) remains attractive — about 263bp on the short end and about 180bp on the long end, while the Bank of Japan's bond-buying operations artificially suppress Japanese bond yields, and market pricing implicitly suggests the BOJ will not raise rates again this year, making the foundation for the carry trade appear solid.

However, the real risk does not lie in whether the BOJ will "significantly raise rates." The lethality of carry trades has never been in small fluctuations in rates, but in the crowded positions triggered by unexpected catalysts causing a stampede-like liquidation. August 2024 serves as a warning: the BOJ only raised rates by 15bp to 0.25%, and combined with worse than expected U.S. employment data, it triggered a chain reaction where the Nikkei dropped 12% in a single day, and USD/JPY plummeted from 156 to 141. The BIS later noted in a retrospective report that carry trades are "picking up coins in front of a steamroller": accumulating stable returns in low volatility periods, but instant massive losses when tail risks erupt. Today's interest differentials are wider than then, and positions will only be more crowded.

JPMorgan Asset Management's Chief Market Strategist for APAC, Tai Hui, put it more directly: "Rate hikes themselves are expected, but what is truly surprising is the overwhelming 7 to 1 support — this indicates that the committee is more worried about inflation than growth."

This statement can be understood conversely: a consensus has formed within the Bank of Japan — 1% is not enough. But the market does not believe it dares to continue raising.

11.7 trillion yen as a "brake pad"

If rate hikes cannot hold back the decline, then just buy yen directly.

The official data released by the Japanese Ministry of Finance on May 29 showed that from April 28 to May 27, Japanese authorities cumulatively spent 11.735 trillion yen (about 73.7 billion USD) to intervene in the foreign exchange market, setting a historical record for monthly intervention scale.

Among these, the largest single-day operation occurred on April 30 (the eve of Japan's Golden Week): the yen surged from 160.72 to 155.50, with a volatility of over 3%, reversing by about 5 yen. Additional operations were also conducted in early May, bringing the total estimated scale to 9.5-10 trillion yen.

This marks the third consecutive year Japan has engaged in large-scale intervention:

April-May 2024: 9.79 trillion yen (about 62.3 billion USD), triggering point at 160.25

July 2024: 5.53 trillion yen (about 36.8 billion USD), triggering point at 161.76

April-May 2026: 11.74 trillion yen (about 73.7 billion USD), triggering point at 160.72

Total over three years: over 27 trillion yen, nearly 180 billion USD.

But what about the results? It's the same every time: a short-term reversal of 3-5 yen, then returning to pre-intervention levels within 4 to 8 weeks.

Jesper Koll, Chief Expert Director at Monex Group, has a vivid metaphor: "Intervening in the exchange rate without changing domestic monetary policy is like stepping on the brake while flooring the gas pedal — the best outcome is a slight jolt for the passengers, the worst outcome is burning out the brake pads."

It is now the time of "burned-out brake pads."

Comparing to the Plaza Accord of 1985 — at that time the G5 acted in concert, coordinating policy, interest rates, and finances, and the yen rose from 240 to 200, achieving a permanent trend reversal of about 17%. Today, Japan is fighting unilaterally, U.S. Treasury Secretary Yellen merely "picked up the phone," with no signs of collaborative action.

Warsh's silence is scarier than rate hikes

The market had a faint hope for the yen: the Fed might cut rates due to economic weakness, thus narrowing the U.S.-Japan interest differential.

The Fed's June meeting completely extinguished that hope.

Fed Chairman Kevin Warsh did two significant things:

First, he refused to submit a dot plot forecast. He is the first Fed chairman not to submit personal forecasts since the dot plot was introduced in 2012. Warsh publicly criticized in the past that the dot plot created a "false sense of precision." However, his choice to remain silent at the June meeting is very subtle — precisely at the moment inflation surged to 4.2%, and the committee was seriously divided. The market cannot "position" this chairman anywhere on the hawk-dove spectrum; uncertainty itself is a form of pressure.

Second, the meeting statement removed previous wording that hinted "the next action will be a rate cut." Combined with 9 hawkish dots and the median rising to 3.8%, this is equivalent to "although we did not raise rates this time, rate hikes are already on the next table."

Market pricing reflects this anxiety: CME FedWatch shows an 8.8% chance of a July rate hike, rising to 34.4% in September, and nearly 50% in October. By year-end, the implied rate priced by the market is about 3.95%.

In other words: the current U.S. rate of 3.63% will not only not be cut, but there is about one-third probability of it rising above 4% by the end of the year.

This means the U.S.-Japan interest differential will not only not narrow but may further widen.

Japan's own inflation ledger

There is a common rebuttal: the yen depreciation benefits Japanese exports, and the Japanese government is actually pleased about it.

This argument may have held before 2022. But Japan in 2026 is no longer that deflationary economy.

In May, Japan's Producer Price Index (PPI) rose 6.3% year-on-year, the fastest increase in over three years, primarily due to soaring energy costs. Although the core CPI fell to 1.4% in April (suppressed by policies such as government gasoline tax exemptions and free high school education), the Bank of Japan clearly stated in its June announcement: "Cost transmission from rising crude oil prices is advancing rapidly in B2B transactions and may spread to broad consumer price increases."

Behind this is the oil price shock brought by the Iran war. Although on June 22 U.S.-Iran negotiations made progress (the U.S. announced a 60-day exemption for Iranian oil exports), Brent crude briefly fell below 77 USD — but the situation in the Strait of Hormuz is still far from stable.

For Japan, rising import energy prices directly push up domestic costs, while yen depreciation amplifies import prices. Prime Minister Fumio Kishida's government has supplemented household energy expenses with a 3 trillion yen budget, but fiscal space is not unlimited.

A deeper issue is the contradiction between the Japanese government's debt stock and interest rate levels.

The Japanese government debt is about 1,250 trillion yen (over 250% of GDP). If interest rates rise further from 1%, just the interest expenditures could consume the fiscal budget. According to estimates by the Japanese Ministry of Finance, for every 1% increase in interest rates, the government's annual interest expenditure will increase by approximately 3.7 trillion yen.

This is the dilemma for the Bank of Japan: not raising rates leads to a continued drop in the yen, worsening imported inflation; raising rates causes a surge in government debt interest expenditures, making fiscal sustainability impossible.

Next steps: three variables determine direction

Whether the yen can stop falling does not depend on what Japan does unilaterally — both the interest hike and intervention paths have already reached their limits. The real variables lie outside Tokyo.

Variable one: whether the Federal Reserve really raises rates again.

This is the most critical variable. Current market pricing shows an 8.8% chance of a July rate hike, but it has risen to 34% in September, and nearly 50% in October. If U.S. CPI and core PCE continue to exceed expectations in the next two months — the June SEP has sharply raised the PCE forecast for 2026 from 2.7% to 3.6% — the probability of a September rate hike could quickly approach over 50%. By then the nominal interest differential between the U.S. and Japan will be close to 300bp, and the yen will likely break through 162.25, entering uncharted territory since 1986. Without the Plaza Accord and without G5 collaboration, there is only a vague technical reference level at 165 above.

Variable two: the actual implementation of U.S.-Iran negotiations.

On June 22, the U.S. announced a 60-day exemption for Iranian oil exports, and the situation in the Strait of Hormuz saw a rare cooling window, with Brent crude briefly falling below 77 USD. If a final agreement is reached before August, Japan, as a net importer of energy, will see significant relief from imported inflation pressures, and falling oil prices will directly narrow Japan's trade deficit, providing structural support for the yen — this scenario is the most favorable for the yen. However, geopolitical negotiations are often volatile, so this should not be used as a base case assumption.

Variable three: the attitude of the Bank of Japan at the July meeting.

After raising rates to 1% in June, market pricing has implied that there will be no further rate hikes this year — this is the core premise of the yen's weakness. However, in the context of a 6.3% year-on-year PPI, if the July statement contains wording like "further adjustments to the accommodative stance are still necessary," even without immediate action, it could marginally change the profit and loss calculations for carry trades. However, Ueda Kaku absent from the June meeting (due to illness) has not publicly spoken, leaving policy signals for the July meeting uncertain.

Conclusion

The story of the yen is never just about the exchange rate.

It encapsulates Japan's survival dilemma in the era of globalization 3.0: an aging, high-debt, energy-dependent economy, whose monetary policy autonomy has been completely shackled by the U.S. interest rate cycle.

The Bank of Japan has raised rates to a 31-year high — not enough. The Japanese Ministry of Finance has spent 180 billion USD — not enough. The Finance Minister calls Washington — the other side merely answered politely.

In 1986, the yen depreciated to the limit at 162, after which it significantly appreciated under the ripple effects of the Plaza Accord. That year, Japan was still the world's second-largest economy, vying for the top spot.

In 2026, the yen has returned to 162. But this time there is no Plaza Accord, no G5 collaboration. Only Japan is stepping on the brakes — while the gas pedal is under Washington's foot.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。