TL;DR

  • The Japanese yen has reached a 40-year low against the US dollar
  • The US Treasury Department states that the yen is "significantly undervalued" and is calling for further rate hikes from the Bank of Japan
  • The BOJ raised its rate to 1 percent in June – the highest level in 31 years – but the yen continues to weaken
  • Market participants are watching for a possible currency intervention by Japanese authorities

US increases pressure on Tokyo

In its semi-annual currency report from Washington, the US Treasury Department concludes that Japanese currency weakness has persisted despite the interest rate differential between the US and Japan having gradually narrowed. According to the report, as covered by ForexLive, the yen has fallen a full 51 percent in real effective terms and against the dollar from the end of 2011 to April 2026 – and the department characterizes this as a "significant undervaluation" of the currency.

The report was published on the same day the yen set a new 40-year record low against the dollar, further deepening market concerns.

51 %
The yen's decline against the dollar since 2011
1 %
BOJ's policy rate – highest in 31 years

Bank of Japan caught in a bind

The Bank of Japan (BOJ) ended its decade-long stimulus program in 2024 as inflation held near its two-percent target. Since then, the central bank has raised rates on several occasions, most recently in June when the policy rate was lifted to 1 percent – the highest level in 31 years, according to ForexLive.

The US Treasury Department argues in the report that further monetary policy normalization would help anchor inflation expectations and curb excessive currency volatility. Global factors such as financial market turbulence and oil price movements are also cited as contributing causes of the yen's weakness.

The yen is caught between US pressure for normalization and political uncertainty in Tokyo over how far the central bank is willing to go.

Takaichi government's dovish profile worries markets

Despite the BOJ having signaled a willingness to continue tightening, investors have continued to sell the yen. A key reason is concern that Prime Minister Sanae Takaichi's government – regarded as dovish on monetary policy – will push back against further rate hikes. This political uncertainty adds additional pressure on the yen, which has already been labeled significantly undervalued by Washington.

The Treasury Department states that it will maintain close dialogue with Japan's Ministry of Finance on macroeconomic issues and currency matters.

The intervention threat hangs over the market

Japanese authorities have previously signaled that they are prepared to step in if the currency moves with excessive volatility. With the yen at historically low levels, currency traders are now watching key technical levels at which verbal or actual intervention could be triggered.

Analysts note, however, according to ForexLive, that any interventions would likely trigger sharp short-covering moves in the market rather than a lasting trend reversal. In other words, it is far from certain that Japanese authorities can reverse the yen's fundamental weakness without a more aggressive shift in monetary policy.

What happens next?

The source material from ForexLive paints a picture of a currency caught in the crossfire of three powerful forces: a US Treasury Department seeking faster normalization, a central bank that appears willing but faces political headwinds, and a market that keeps selling the yen for as long as the political risk premium exists.

For Norwegian and international investors with exposure to Japanese assets or currency pairs such as USD/JPY, the risk picture is asymmetric: a sudden intervention or a surprise BOJ rate hike could trigger an abrupt yen strengthening and volatile market moves at short notice.