Why a Weak Japanese Yen Could Trigger Government Intervention

Currency markets have been braced for a possible intervention by the Japanese government to prop up a weak yen. The depreciation over the course of 2025 has made imports more expensive and pushed up households’ costs.

The yen hit an 11-month low versus the US dollar in December, prompting Finance Minister Satsuki Katayama to warn against speculative trading and signal that authorities stand ready to “take bold action” should excessive movements persist.

The currency strengthened after her comments but remains under pressure. It’s unclear how far — or how quickly — the yen would need to drop before the government steps in. 

Japanese officials insist that any direct intervention will be triggered by sharp or disorderly swings rather than a specific exchange-rate threshold.

What’s behind the yen’s recent weakness?

The Bank of Japan (BoJ) raised interest rates to the highest level in 30 years in December, in a move that was widely signalled ahead of time. However, Governor Kazuo Ueda’s remarks at a post-decision briefing helped trigger a slide in the yen as some traders anticipated more hawkish language on the future direction of borrowing costs. Expectations are brewing that the central bank may not move again for some time.

Why is the yen’s weakness a cause for concern?

The yen’s slide over the past decade or so has transformed Japan into an affordable travel destination for millions of foreign tourists and boosted the profits of the nation’s biggest exporters.

But in an economy heavily dependent on imported energy and raw materials, the feeble yen has also driven up costs, fuelling inflation for households and squeezing margins for domestically focused businesses.

 The resulting cost-of-living crunch helped bring down two prime ministers before the current leader, Sanae Takaichi, took office.

Beyond the domestic picture, there’s another reason why Japan’s government may want to act. US President Donald Trump has repeatedly criticised Japan for its weak currency, arguing that it gives Japanese manufacturers an unfair trade advantage. This issue came up in trade negotiations between the two nations.

What is currency intervention?

When a country’s central bank steps into the foreign exchange market with the intention of strengthening or weakening its currency, that’s known as direct intervention.

Japan is committed to international pacts that stipulate markets should determine exchange rates. That said, the Group of 20 has acknowledged that excessive or disorderly currency moves can threaten economic and financial stability, giving members wiggle room to intervene when volatility spikes.

In Japan, the Finance Ministry decides when to act and the BoJ carries out the operation via a limited number of commercial banks, who either buy yen and sell dollars to strengthen the local currency, or sell yen and buy dollars to weaken it. The scale of the transactions depends on how much impact the ministry seeks and how quickly the market reacts.

Where does the money come from?

The dollars typically come from Japan’s foreign reserves in the form of cash or US Treasury holdings. Japan appeared to sell some of its Treasuries to help finance its interventions to prop up the yen in 2024.

As of the end of November, Japan had $1.16tn in foreign currency.

How effective is currency intervention?

Intervention is a clear way for the government to tell speculators that it won’t allow its currency to go into free fall or rocket up. However, this is only a temporary fix unless any economic fundamentals driving the trend are also addressed.

In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up the currency.

 A unilateral move is still seen as unlikely to turn the tide of currency momentum, although it can buy time until market dynamics change.

How often does Japan intervene in its currency market?

Japan has exchanged vast amounts of money over the years. While this was usually to weaken the yen, recent intervention has been in the opposite direction. The government spent almost $100bn on yen-buying to prop up the currency in 2024. On each of the four occasions the exchange rate was around 160 yen per dollar, setting that level as a rough marker for where action might take place again.

To keep traders guessing, officials often don’t immediately confirm that they’ve intervened. The Finance Ministry instead discloses the amount spent on intervention at the end of each month. Generating doubt and fear of losses in the market is part of the government’s strategy, making the comments from officials highly potent.

What is verbal intervention?

To keep traders on guard and slow movements in markets, senior officials can make remarks that hint at the prospect of intervention and bloody noses for market participants. Comments by the finance minister or the ministry’s top currency official can quickly scare speculators.

Officials typically use a carefully calibrated set of expressions to ratchet up their warnings and show how close they are to moving.

 References to “taking action” suggest intervention is close.

What are the flow-on effects of monetary intervention?

When Japan’s authorities intervene in currency markets, the immediate impact is typically sharp. Past episodes show the yen jumping by around 2 yen against the dollar within seconds and 4 to 5 yen within hours.

These abrupt swings can cause huge losses for traders making speculative bets that the currency will keep moving in the previous direction. 

Sharp moves can also cause headaches for businesses trying to price goods, make payments and hedge against exchange rate fluctuations.

For the government, intervention also carries political and diplomatic risks. It can draw criticism for currency manipulation, especially when intervention is aimed at weakening the yen, a direction that can help exporters with trade. 

That charge is harder to argue when the government acts to support the yen.

What is the US stance on a weak yen?

Trump accused Japan’s leaders in early March of guiding the yen lower to gain a competitive advantage and said that tariffs on Japanese goods were the solution.

Japan remains on the US Treasury Department’s “monitoring list” for foreign-exchange practices after posting a trade and current account surplus against US, but doesn’t fulfil all the conditions to be characterised as a currency manipulator.

Treasury Secretary Scott Bessent has said the yen will reach an appropriate level if the BoJ continues to get its policy right. That suggests he favours higher interest rates in Japan to strengthen the yen over stepping into currency markets.

The US and Japan issued a joint statement in September to reaffirm that intervention “should be reserved for dealing with excess volatility or disorderly movements” and not for competitive advantage. Katayama has indicated that the joint accord essentially gives her a “free hand” to take action if needed.

Ultimately, any intervention would take place after prior notice to the US and if it ended up strengthening the yen, it may be tacitly welcomed by the Trump administration.