How the weak yen impacts investments around the world

The Japanese yen fell to a 40-year low against the U.S. dollar, leaving investors wary of possible government intervention that could have repercussions for U.S. stocks, the Treasury market and the global economy as a whole.

The yen's fall to its lowest level since 1986 was driven by a recent shift in expectations for US interest rates - largely due to the war with Iran - and the recovery in the dollar.

The Japanese government sought to intervene to support the yen earlier this year, but was unable to contain the devaluation. With the currency hitting new decade lows, market operators are preparing for a new attempt at intervention.

Why is the yen falling?
Traders estimate that the Fed (Federal Reserve) will keep rates stable, or even raise them, in the coming months to combat inflation caused by the shock in oil prices resulting from the US and Israeli war against Iran.

This change in the Fed's outlook led to a strengthening of the dollar, putting pressure on the yen and other currencies. The US dollar index is up 3% this year, recovering after a 9% drop in 2025.

"The shock in energy prices triggered by the war between the US and Iran was the final catalyst for the weakening of the yen, a movement reinforced by the recent change in communication from the Fed, which began to signal a more hawkish stance," said Lee Hardman, senior currency economist at MUFG.

Currencies often fluctuate based on interest rate differences between countries.

On June 16, the Bank of Japan raised the key interest rate to 1% - the highest level since the 1990s.

However, the Bank of Japan's interest rate remains considerably lower than that of the Fed, which in June held the rate steady in the 3.5% to 3.75% range.

This difference is directing capital towards the US and away from Japan as investors seek better returns, which strengthens the dollar - putting downward pressure on the yen - and increases volatility in global markets.

On Monday (29), the Supreme Court also ruled that President Donald Trump cannot fire Fed Director Lisa Cook without proof of any irregularity, reinforcing the independence of the American central bank.

The Fed's firm stance on inflation, coupled with the reinforcement of its independence, has supported the dollar (and pressured the yen downward).

In recent months, the Japanese currency was at its lowest level against the dollar since 2024, but in recent days it has fallen below that level, reaching its lowest point since the 1980s.

High interest rates in Japan impact investors around the world | MONEY REVIEW

What does a weak yen mean for Japan?
Japan maintained extraordinarily low interest rates - ranging from zero to negative levels - throughout the 2000s and 2010s in an attempt to stimulate the economy and avoid deflation after the country fell into a severe recession in the 1990s.

In 2024, the Bank of Japan began raising interest rates as the country began to record inflation above the 2% target established by the monetary authority.

However, the yen has continued to depreciate as Japan's interest rates remain low compared to the rest of the world.

A sharp and uncontrolled currency devaluation - combined with persistent inflation - could trigger an economic crisis.

A weaker currency can make imported goods more expensive, and Japan imports much of its food and energy.

The conflict involving the USA, Israel and Iran, combined with soaring oil prices, has generated significant impacts on Asian economies that depend on oil from the Middle East.

"Japanese officials have made clear that the yen's weakness poses a threat to import costs and worsens Japan's cost of living crisis, a central issue for the electorate," said Chris Turner, global head of markets at ING, in a report.

How would a Japanese intervention affect US markets?
The Japanese government could increase the value of the currency by selling US dollars or dollar-denominated assets - such as US Treasury bonds - and then buying yen.

The intervention could take place as early as this weekend, according to Turner, from ING.

A rally in the yen could move financial markets by putting pressure on the dollar and US Treasury bonds.

The government has already intervened in the markets before - including at the beginning of this year. Japan sold about $70 billion in assets in late April and early May in an effort to boost the yen, according to ING.

There was minimal impact on US markets, but the intervention did not resolve the underlying problems.

If Japan sold more of its U.S. Treasury holdings, that could push yields higher. Yields rise when bond prices fall.

Analysts say, however, that the overall effect would be modest, given the size of the US bond market.

"Japan's currency intervention efforts are typically carried out on too small a scale - tens of billions versus about $29 trillion in tradable Treasuries - to make a significant impact on U.S. yields," said Karl Schamotta, chief market strategist at Corpay.

For the stock market, there are still implications. A popular trade on Wall Street involves borrowing yen to invest in U.S. stocks - something relatively cheap given the Bank of Japan's history of near-zero interest rates.

However, if the value of the yen skyrockets as a result of government intervention just as the Japanese monetary authority is raising rates, the cost of borrowing suddenly increases.

This could lead to the dismantling of the so-called carry trade, forcing traders to sell shares to pay off loans.

In August 2024, a reversal of the so-called carry trade - triggered by the Bank of Japan's interest rate hike that July - led to a sharp sell-off in US stocks, particularly technology stocks.

"The situation we find ourselves in halfway through the year is proof of the absolute unpredictability of this moment," said Schamotta. "In January, most observers expected a continued decline in the dollar and a recovery in the yen. Faced with major imbalances in the global economy, both predictions were refuted."

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Source: CNN