The possibility of joint dollar-yen intervention by Japanese and U.S. authorities has helped arrest some of the yen’s fall, but past episodes suggest such action is more likely to blunt volatility than to deliver a sustained reversal. The debate has intensified because Prime Minister Sanae Takaichi is using a snap lower-house election as a political mandate to expand stimulus, raising questions about the durability of Japan’s public finances.
With the vote less than two weeks away, Tokyo has signaled it could step into foreign-exchange markets for the first time since July 2024. Officials have also indicated they are coordinating closely with U.S. counterparts as they monitor currency moves. The yen’s extended slide this year has become emblematic of market unease over Japan’s fiscal strength, even as long-term Japanese government bond yields reached record highs this year - a factor that might normally support a currency.
Market participants say the currency’s behavior has been unusually forceful. "The currency is reacting aggressively," said Toshinobu Chiba, a Tokyo-based fund manager at Simplex Asset Management. Chiba warned the yen could weaken as far as 180 per dollar - a level not seen since 1986 - if Takaichi achieves a decisive election victory and pursues larger stimulus measures. He and other traders expect levels beyond 160 to spark an initial round of intervention, but he cautioned that the Ministry of Finance may have limited influence given the lack of investor trust in Japan’s fiscal control.
Japan’s government debt is already roughly 230% of gross domestic product, the highest ratio among developed economies. The election campaign has elevated concerns about fiscal discipline because Takaichi - and her principal opponents - have pledged to suspend the consumption tax on food, a levy that generates about 5 trillion yen ($32.36 billion) of annual revenue, without specifying how they would plug the resulting gap.
Those political pledges triggered market stress last week. Long-dated Japanese government bond yields climbed to record highs while equities posted their worst three-month selloff in recent memory, and the yen pushed to record lows against the euro and Swiss franc. Traders have warned that a broad, self-sustaining "Sell Japan" move, crossing asset classes, would be damaging for the government as it heads into the election.
In that context, the yen abruptly strengthened on Friday after a session in which the currency had been sold aggressively despite signals of policy tightening from the Bank of Japan. The move - a sharp rise and then a further jump several hours later - appeared consistent with so-called rate checks conducted by the BOJ and the Federal Reserve Bank of New York. The yen moved from about 159.20 per dollar in the late Tokyo afternoon to as strong as 153.30 by Friday’s close. By Tuesday it last traded at 154.75.
Japan’s top currency diplomat, Atsushi Mimura, declined to confirm reports of those rate checks, saying only that policymakers would stay closely coordinated with U.S. peers and respond "appropriately." While joint action between Tokyo and Washington is rare, U.S. officials have been publicly supportive of a stronger yen against the dollar, increasing expectations that collaboration is possible.
Yet even if additional official firepower were deployed, many analysts caution the limits of intervention. Historically, intervention serves primarily to smooth or slow abrupt currency moves rather than to completely reverse a trend driven by a major underlying concern. Tokyo spent a combined 15.3 trillion yen on market intervention in 2024 to try to stem aggressive yen selling when the Bank of Japan and the U.S. Federal Reserve pursued sharply different policy paths. Despite that unprecedented outlay, a bout of intervention in late April 2024 was followed by the yen reaching new lows within two months.
A later intervention in July 2024 achieved better short-term results, in part because it coincided with a surprise dovish shift from U.S. monetary authorities in August at the Jackson Hole meeting. That external development helped stabilize the yen then - a conjuncture not guaranteed to repeat itself now.
Beyond the single policy move to suspend the food consumption tax, officials worry that once politically removed, the levy could be difficult to reinstate. The consumption tax increases put in place since 2014, though unpopular, have been an important contributor to improving Japan’s fiscal position, said Chris Scicluna, head of research at Daiwa Capital Markets Europe. "The snap election is very much crystallising in investors’ minds the risks that Japan’s public finances just are not going to put on a sustainable path," he said.
Scicluna acknowledged Japan retains some supportive dynamics - such as the reemergence of inflation and modest economic growth - but he warned that politics is complicating policy choices. For market participants watching exchange rates, bond yields and equities, the near-term balance will hinge on election outcomes and the degree to which authorities are prepared and able to use coordinated intervention as a tool to contain market disruption.
Clear summary
Hints of coordinated yen intervention between Tokyo and Washington have provided temporary relief for the currency, but past interventions have only smoothed moves rather than permanently reversed trends. Prime Minister Sanae Takaichi’s election-focused push for expanded stimulus - including a pledge to suspend the food consumption tax, which accounts for roughly 5 trillion yen in annual revenue - has heightened investor concern about Japan’s fiscal sustainability. That worry has manifested in record-high long-dated JGB yields, stock market weakness and the yen’s slide against major currencies. Policymakers face limited options: intervention can damp volatility but may not fully restore confidence unless political decisions address fiscal credibility.
Key points
- Tokyo and Washington have signaled possible coordinated action to support the yen, but historical experience suggests intervention mainly moderates moves rather than reverses trends.
- Political pledges in a snap election - notably suspending the food consumption tax, which raises about 5 trillion yen annually - are intensifying investor concerns about Japan’s near-term fiscal path and borrowing credibility.
- Markets have reacted with long-dated JGB yields reaching record highs, equity selloffs, and the yen falling to multi-currency troughs, indicating stress across fixed income, equities and FX markets.
Risks and uncertainties
- Fiscal risk from potential suspension of the food consumption tax could exacerbate Japan’s sovereign credit concerns and affect bond markets and borrowing costs.
- Intervention may only delay or smooth currency moves rather than prevent further depreciation if investors remain unconvinced of fiscal discipline - a risk for exporters and domestic financial stability.
- Political difficulty in reinstating unpopular consumption taxes could create persistent uncertainty about Japan’s policy trajectory, with knock-on effects for equities and fixed income.
Exchange rate reference: $1 = 154.5200 yen.