Yen plunges 1% to 159 per dollar, erasing half of US-Japan intervention gains

Chris Price Mon, August 10, 2026 at 8:45 AM PDT | 3 min read

• JPY=X -0.00%
• DX-Y.NYB -0.02%

The Japanese yen has suffered its sharpest sell-off since February, as an American attempt to prop up the ailing currency unravels.

The yen fell by as much as 1% to 159 against the dollar on Monday, wiping out around half of its gains since last week, when the U.S. Treasury bought the currency for the first time in 15 years.

Japan's currency dropped to a 40-year low in July amid a wide discrepancy in interest rates between the two countries, with rates far higher in the U.S.

The decline will add to pressure on the Bank of Japan to raise interest rates to support its currency. It has also raised questions among investors about whether Donald Trump's administration will be forced to intervene for a second time to bolster the yen.

The latest fall will ring alarm bells in the U.S. that its Asian ally could sell off its substantial holdings of American debt to further prop up the yen. Such a move would push up the cost of U.S. government borrowing, which is already under strain from the U.S.'s $40 trillion (£30 trillion) debt burden.

Seth Carpenter, the chief global economist at Morgan Stanley, said: "The US-Japan intervention does not change our outlook on the fundamental drivers of the yen."

Interest Rate Divergence Persists

The yen has fallen despite the Bank of Japan raising interest rates in recent years. Rates have risen from negative 0.1% in 2024 to 1% today, as the world's fourth-largest economy reflates after decades of malaise since the early 1990s.

However, rates remain well below levels in the U.S., where the Federal Reserve's funds rate sits in a range of 3.5% to 3.75%.

Intervention and Market Reaction

The Japanese government confirmed last week that it had taken action with the U.S. to boost the yen and counteract "excessive volatility and disorderly movements in recent months."

The intervention triggered a sharp spike in the value of the currency as traders betting on declines were forced to recalibrate their positions.

In a statement last week, U.S. Treasury Secretary Scott Bessent said the White House would "strongly support Japan's decisive market and monetary steps to correct the substantial undervaluation of the yen."

He added: "The Takaichi government is moving into an exciting new phase of Abenomics, as nearly 15 years of powerful stimulus have created durable, robust underlying economic dynamics."

Speculators cut their bets on declines in the Japanese yen by the most in more than 12 years, according to data from the Commodity Futures Trading Commission released on Friday.

Expert Warnings

Claudio Irigoyen, a global economist at Bank of America, warned the intervention would raise pressure on the Bank of Japan to raise rates further.

He said: "Foreign currency intervention is generally ineffective unless imbalances are addressed. Coordinated intervention raises the need for credible policy follow-through in Japan to stabilise the yen. The Bank of Japan will likely be under high pressure if the Fed hikes in September, in our view."

Mohamed El-Erian, the chief economic adviser at Allianz, said on Monday: "The yen has been weakening gradually since the large joint Japan–US FX intervention, a sharp reminder that the key to fixing a currency 'mispricing' is getting the policy mix right. The longer Japan delays in doing so, the more elusive the goal of this historic intervention becomes."

Outlook

Markets are pricing a 60% probability that policymakers at the Bank of Japan will vote to increase interest rates by 0.25 percentage points to 1.25% at its next meeting in September.

Neil Shearing, chief economist at Capital Economics, warned that the decline in the yen alongside rising government costs in Japan showed that investors are becoming less confident about the government's spending plans.

He added: "Markets have become concerned that the government's rhetoric points to a less disciplined fiscal regime in future."

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