The Japanese yen falls to its lowest level in nearly 40 years amid anticipation of government intervention to support the currency.

The Japanese yen continued its decline on Tuesday, falling to its lowest level against the US dollar in nearly four decades, as the widening interest rate gap between the United States and Japan increased pressure on the Japanese currency and revived speculation about potential government intervention in the foreign exchange market. The USD/JPY pair rose to 162.40 yen per dollar , its highest level since December 1986, bringing the yen’s losses since the beginning of the year to more than 3% .

This decline comes at a time of growing investor doubts about Japan’s ability to contain inflation, while major central banks, most notably the US Federal Reserve, continue to adopt increasingly tight monetary policies. In this context, Japan’s Chief Cabinet Secretary Minoru Kihara affirmed that the government is “prepared to take necessary measures at any time,” a clear indication that the option of direct intervention in the currency market remains on the table should the sharp fluctuations persist.

Analysts believe one of the main reasons for the yen’s weakness is the market’s perception that the Bank of Japan is still lagging behind other central banks in addressing inflationary pressures, which have raised interest rates at a faster pace. Although the Bank of Japan recently raised interest rates to around 1% , the highest level since 1995, markets anticipate only a further modest increase by next January.

Conversely, forecasts suggest the US Federal Reserve may raise interest rates one or two more times, bringing them closer to 4% , which increases the attractiveness of dollar-denominated assets compared to Japanese yen. This wide interest rate differential is prompting investors to buy dollars and sell yen, further pressuring the Japanese currency.

The pressures on the yen weren’t limited to monetary policy; the strong performance of the Japanese stock market also contributed to the downward pressure. The Nikkei 225 ‘s record high this year attracted significant inflows of foreign investment into artificial intelligence and semiconductor stocks, with many investors hedging against currency volatility by selling yen, thus accelerating its decline.

Japanese authorities had already intervened during April and May, spending tens of billions of dollars to buy yen in an attempt to stop its collapse against the dollar.

Observers believe that the new intervention decision will depend not only on the exchange rate level but also on the speed of the depreciation. Japanese authorities have historically tolerated currency weakness as long as the decline is gradual, but typically intervene when movements become sharp and rapid. Japan possesses massive foreign exchange reserves estimated at around $1.3 trillion , giving it considerable capacity to intervene in the currency markets if it deems the yen’s weakness a threat to financial or economic stability.