Japan’s yen is resembling a slow-motion train wreck as it remains stuck near 40-year lows, and there could be even more downside ahead.
On Monday, the yen was down 0.58% at 162.30 per dollar. It’s fallen 3.6% so far in 2026 and nearly 11% from a year ago.
Some of the more recent triggers include fears that Japan is lagging on efforts to fight inflation after the oil shock from the Iran war. While the Bank of Japan has hiked rates, more aggressive tightening may be necessary.
At the same time, other central banks are poised to get tougher, such as the Federal Reserve, making Japan’s policy and currency weaker by comparison.
Prime Minister Sanae Takaichi’s plans for more deficit spending, which would stoke inflation further, are adding to downward pressure on the yen.
But Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, has been sounding the alarm on the yen for a while and points to Japan’s massive debt, which has ballooned to 240% of GDP.
In his view, the Bank of Japan is suppressing bond yields to prevent interest costs on the debt pile from becoming unmanageable. In the process, it also obscures the debt-crisis risk that would otherwise be manifested in higher yields.
“That puts depreciation pressure on the yen, since investors have little incentive to stay in Japan,” Brooks explained in a Substack post last week.
While a weak yen can aid Japan’s exports, it risks friction with trading partners like the U.S., especially as the Trump administration seeks to shrink the trade deficit. A cheap yen also exacerbates inflation by making imports more expensive, and the country relies heavily on overseas energy.
To prevent precipitous yen depreciation, Tokyo has periodically intervened in markets and spent tens of billions of dollars to shore up the currency in April and May.
But that has failed to halt the yen’s slide, and so-called verbal intervention from Japan’s chief cabinet secretary, who said last week that the government “stands ready to take action whenever necessary,” also fell flat.
Brooks warned Japan’s intervention is “doomed to fail because it treats the symptom (yen depreciation) and not the disease (too much debt).”
“In fact, it’s my view that FX intervention is deeply counterproductive because it creates the illusion that nothing’s wrong when—actually—there’s a very serious crisis brewing,” he added.
For now, markets are misinterpreting the yen’s quiet implosion as gradual weakening that’s being managed in a controlled fashion as the constant threat of intervention holds off steeper declines, Brooks argued.
The surface-level appearance of calm, however, is misleading and unsustainable as recent currency interventions have proven less and less effective, he warned.
“There’ll come a point when markets will just ignore intervention,” Brooks predicted.
As long as the Bank of Japan continues to prevent bond yields from expressing the country’s true debt risk, the yen will face depreciation pressure and intervention will be increasingly useless, he said, adding that the yen will eventually sink to 170 per dollar.
In contrast to the yen, Japan’s Nikkei 225 stock index is on fire and has soared 38.5% so far this year, while the S&P 500 is up 10%.
Such a rally would typically translate to more demand for the yen as investors rush into Japanese stocks. But traders have been engaged in significant currency hedging, putting downward pressure on the yen, according to the Financial Times.
The result is that Tokyo appears stuck, staying the course on a policy that isn’t working.
“The Japanese probably realize that FX intervention at the moment is an exercise in futility,” Chris Turner, ING’s global head of markets research, told the FT. “But they don’t want to leave yen losses unchecked in case it triggers a ‘sell Japan’ mindset should Japanese government bonds and then equities come under pressure, too.”
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