The yen resumed its decline and approached the 160 mark, highlighting the limitations of intervention and the impact of Sanae policy on the high market

The yen has resumed its decline over the past two weeks, giving up gains made after the United States and Japan spent tens of billions of dollars to intervene in currency markets - before the intervention, the yen's exchange rate had fallen to nearly 40-year lows.

The intervention at the end of July once caused the yen to strengthen intraday, rising to 155 yen per dollar. But the gains quickly faded, with the yen trading at about 159 yen to the dollar as of Friday. This new round of weakness is approaching the 160 yen mark, which may test the determination of officials in Tokyo and Washington. They have said that if the "disorderly yen trend" continues, they will not hesitate to intervene again.

The reversal highlights the limits of one-off currency intervention while investors remain uneasy about Japan's massive debt load, Prime Minister Sanae Takaichi's stance on pushing for aggressive government spending and expectations that the Bank of Japan will raise interest rates too slowly.

"It's not surprising that the yen is weakening again," said Marcel Thielian, head of Asia-Pacific at economic research firm Capital Economics. "If the fundamentals haven't changed, there's no reason to think this intervention will have a lasting impact."

The yen's long-term decline began in 2022, when the Federal Reserve quickly raised interest rates to curb post-pandemic inflation and the Bank of Japan maintained negative interest rates. Widening interest rate differentials make U.S. dollar assets more attractive, driving capital flows to the U.S. and pushing down the yen. By mid-2023, U.S. interest rates are above 5%, while Japanese interest rates remain at -0.1%.

By 2024, the yen has weakened from about 110 yen to the dollar in 2021 to about 150 yen per dollar. The Bank of Japan will raise interest rates for the first time in 17 years in 2024. Further interest rate increases since then have helped stabilize the exchange rate, but it remains weak relative to historical levels.

Subsequently, in October 2025, Sanae Takaichi became prime minister. From the beginning, she advocated low interest rates and aggressive government spending to stimulate investment and economic growth. Before the election, she once called the prospect of the Bank of Japan raising interest rates "foolish."

Her stance adds to unease among global investors already concerned about the sustainability of Japan's public debt, which is already more than twice the size of the economy.

In recent months, Takaichi Sanae has eliminated a gasoline tax surcharge and restored electricity and fuel subsidies. Shortly after the joint intervention by the United States and Japan in July, the Gao city government decided to lower the food consumption tax rate from 8% to 1% for two years starting next spring.

Economists say the factors driving the yen have also changed. While the yen has been weakening for years, its movements appear to be less correlated with interest rate differentials under high market Sanae. Even if the Bank of Japan continues to raise interest rates, it has not been able to effectively boost the yen.

The Bank of Japan has raised interest rates roughly every six months since 2024, most recently in June. Market expectations are that the central bank may take action again at its next policy committee meeting in September.

U.S. Treasury Secretary Scott Bessent has repeatedly signaled support for Japan to raise interest rates, telling public broadcaster NHK this month that he believed the BOJ would "make the best choice" because a weak yen would fuel inflation.

Further interest rate increases may narrow the interest rate gap between Japan and the United States and relieve some of the pressure on the yen. But at some point, it may also make Japanese government bonds more attractive to domestic investors, causing capital to flow out of U.S. Treasuries, depressing U.S. bond prices and thus pushing up U.S. borrowing costs.