Japan’s battle against the weak yen is colliding with economic reality

After multiple warnings against the “speculative” and “one-sided” currency moves, Japan’s Ministry of Finance appears to have put its money where its mouth is and intervened in the yen during the country’s Golden Week holiday. 

The first intervention, reportedly on April 30, came after the yen weakened past the politically sensitive 160 yen level, marking the first yen-buying operation since July 2024. The yen surged by as much as 3% on that day, according to LSEG data.

The yen appreciated sharply again Wednesday, fuelling market speculation that Tokyo had stepped into the currency market for a second time in recent days. The currency strengthened to as much as 155.02 per dollar from Tuesday’s close of 157.87, a gain of almost 2%.

While a stronger yen typically erodes the profit margins for Japanese exporters and makes their goods less price-competitive, a weaker yen raises the cost of energy, food, and raw materials, which the East Asian country is heavily reliant on.

Japan’s finance ministry may have spent as much as 5.48 trillion yen ($35 billion) to support the currency on April 30, just shy of the $36.8 billion last spent in July 2024, according to Reuters.

Authorities typically refrain from immediately confirming currency interventions, but they usually issue warnings beforehand — an intentional, strategic ambiguity that keeps the element of surprise to maximize market impact.

Analysts told CNBC the timing and scale of the yen’s move suggested official action on April 6.

“Price action that appears to suggest intervention has been observed,” said Hirofumi Suzuki, chief FX strategist & head of research at Sumitomo Mitsui Banking Corporation, on April 6. This showed that authorities are determined to defend the yen, even on a holiday, he added.

Nikos Tzabouras, senior market analyst at trading platform Tradu, noted that the intervention was timely.

“Although it is not known if such action has actually occurred, the timing is opportune — thin liquidity from closed Japanese markets and a dollar already on the back foot amid renewed U.S.-Iran deal hopes could amplify its impact,” he said.

However, the frequency of these interventions and their effectiveness remain in question, according to analysts.

Japan held $1.16 trillion in foreign exchange reserves at the end of March, which means if every intervention is at the reported $34.5 billion, it can intervene about 32 more times, said Francis Tan, Indosuez Wealth Management’s chief Asia strategist.

“So, it seems that there is still some room for reserves not to be a big issue. Japan has plenty,” he added.

However, just because it can, does not mean Tokyo will. Japan can conduct only two more interventions by November to maintain its status as a freely floating exchange rate, according to the International Monetary Fund (IMF)’s classifications.

Repeated interventions could draw greater international scrutiny if authorities continue stepping into the market frequently.

Japan’s top currency official, Atsushi Mimura, told reporters Thursday the IMF’s designation of Japan as operating a free-floating exchange rate system does not limit how often authorities can intervene in the currency market.

U.S. Treasury Secretary Scott Bessent is reportedly expected to meet his Japanese counterpart, Satsuki Katayama, next week, according to Nikkei, with currency issues expected to be on the agenda.

While the suspected interventions have strengthened the currency, albeit momentarily, they do not appear to have meaningfully turned the tide. 

While the yen strengthened momentarily after the suspected intervention on April 30, it began to weaken over the next three sessions.

Still, analysts questioned whether intervention alone could reverse the yen’s broader decline.

Analysts said the main pressure on the yen stems from the difference in interest rates between the U.S. Federal Reserve and the Bank of Japan, which has fueled the so-called yen carry trade. 

The BOJ’s policy rate currently stands at 0.75%, while the U.S. Federal Funds rate is at 3.50% to 3.75%, a difference of up to 300 basis points. 

That gap has encouraged investors to “carry” the interest rate differential as profit, borrowing in a currency with low interest rates, such as the Japanese yen, and reinvesting in higher-yielding assets denominated in higher-yielding currencies.

Japan has seen “relentless” capital outflows from both Japanese retail and institutional investors as domestic fixed-income returns are very unattractive, said Jesper Koll, expert director at Tokyo-based financial services firm Monex Group. 

“The Bank of Japan continues to be the only central bank allowing negative real interest rates, and domestic investors have zero tolerance for negative returns on their capital,” Koll added. 

At its April meeting, the BOJ noted that real interest rates remain significantly low despite the policy rate being 0.75%. 

Should the BOJ continue to stand pat on rates, the yen’s weakness is likely to persist, as a rise in interest rates usually accompanies a strengthening of the currency. 

“This highlights the tension between BOJ’s cautious approach to monetary tightening and the Ministry of Finance’s efforts to stabilize the currency,” Carlos Casanova, senior economist for Asia at Swiss private bank UBP. 

Koll was unequivocal about the dilemma facing Japan’s policy makers.

“Intervention without changing domestic monetary policy is like tapping the brake while keeping your right foot firmly on the accelerator — at best, your passengers have a little fun, at worst, you’re burning through your brake pads.”

The central bank faces a different balancing act. Hiking rates to prop up the yen could pose a policy bind for the BOJ as it would crimp an already struggling Japanese economy and push bond yields higher. 

Japanese government bond yields are at their highest levels in almost 30 years, with the 10-year benchmark hitting a high of 2.537% on April 30.

Bessent, who is also expected to meet Prime Minister Sanae Takaichi during his trip to Japan, has previously favored the BOJ to hike rates faster.

Indosuez’s Tan said the BOJ has to continue hiking rates, even though it will be painful for the economy. In fact, he said, the BOJ could plan more hawkish policies since inflation expectations are up. 

A Bank of Japan survey released in April showed that more than 83% of the respondents expect prices to be higher after one year.

Japan’s economy, on the other hand, narrowly avoided a technical recession in the last quarter of 2025, with growth revised to 0.3% quarter-on-quarter and 1.3% from a year ago.