Yen at 40-Year Low: Japan Walks a Tightrope

Fragile Calm in Currency Markets — But Pressure Is Building

The Japanese yen stabilized around 161.2 per dollar on Friday, after the currency fell to its weakest level against the dollar in four decades on Tuesday — 162.84. The recovery was largely driven by broad dollar weakness in the wake of a weaker-than-expected U.S. jobs report, which tempered expectations of imminent rate hikes from the Federal Reserve, according to ForexLive.

A sudden yen strengthening on Thursday fueled speculation that Japanese authorities had intervened, but most market participants concluded the move was too small to represent an official intervention.

Tokyo is ready to respond at any time — including when U.S. markets are closed for the holiday.

Finance Minister Satsuki Katayama stressed to markets that the government's stance remains unchanged, and that Japanese and U.S. authorities are in close, ongoing dialogue on currency matters. She made clear that the readiness to act applies regardless of whether Wall Street is open.

Bankruptcies and Import Costs Squeeze Businesses

The yen's prolonged weakness is leaving a tangible mark on Japanese business. According to Tokyo Shoko Research, the number of bankruptcies directly linked to the weak yen reached 45 in the first half of 2026 — an increase of 32.3 percent compared to the same period last year.

The wholesale sector has been hit particularly hard, as many companies lack the pricing power to pass higher import costs on to customers. The research firm warns that this trend will persist for the foreseeable future.

When asked about the bankruptcy trend, Katayama stated that the government will proceed with measures to strengthen the private sector — without specifying concrete tools.

Record-High Government Bond Yields Spark Fresh Concern

Alongside the currency turbulence, Japanese government bonds (JGBs) are also under pressure. The 10-year yield rose on Friday to its highest level in 30 years, after markets interpreted Prime Minister Sanae Takaichi's economic plan as a signal of significant new public spending and resistance to further rate hikes from the Bank of Japan (BOJ), according to ForexLive.

This comes despite Japanese tax revenues hitting a record in fiscal year 2025, at 84.2 trillion yen — fully 3.5 trillion yen above the budget estimate and the sixth consecutive record year. The impressive tax haul was nonetheless unable to reassure investors.

Internal Divisions Over Monetary Policy

Katayama dismissed the suggestion that the government's plan represents a change of course, arguing that the document merely reaffirms existing policy. But cracks in the official consensus are visible.

Toshihiro Nagahama, an economic adviser to the prime minister with a historical association with loose fiscal and monetary policy, this week called for moderate rate hikes from the BOJ to stem further yen weakness and prevent government bond yields from spiraling out of control. This stands in direct contrast to the direction signaled by Takaichi's plan.

The tension between fiscal expansion and monetary tightening looks set to remain a central theme for traders watching both the yen and JGB markets heading into the new week.

What Happens Next?

With the yen still near historic lows, rising bond yields, and clear policy contradictions within the Japanese government apparatus, the risk of renewed market turbulence is high. The intervention pressure from the Finance Ministry is real, but currency strategists such as Carol Kong of Commonwealth Bank of Australia have previously noted that intervention alone is unlikely to reverse the long-term trend in USD/JPY.

Traders will be watching closely for any statements from Katayama and BOJ representatives in the days ahead, as well as new data that could signal the Fed's future rate path.