Renewed U.S.-Iran conflicts have escalated global safe-haven sentiment. The U.S. dollar (USD) maintains its strength. The Japanese yen (JPY) continues to weaken against the USD and briefly plummeted past 163 JPY to 1 USD. This marks a near 40-year low. The Japanese government stated it is prepared to intervene in the foreign exchange market if necessary. The market reaction has nevertheless been limited. The JPY continues its depreciating trend.
Fundamentals, Interest Rate Spreads, and Fiscal Concerns Suppress the JPY
Lee-Rong Wang, a consultant at the Center for Economic Forecasting of the Chung-Hua Institution for Economic Research (CIER), analyzed three main factors driving the JPY’s continuous depreciation. First, Japan’s ongoing trade deficit provides insufficient support from economic fundamentals. Second, the Bank of Japan has initiated rate hikes, but interest rates remain relatively low. The U.S.-Japan interest rate spread remains significant. Funds consequently continue to flow into U.S. dollar assets.
The Japanese government also continues to pursue expansionary fiscal policies. Market concerns regarding fiscal sustainability are rising given the already high level of government debt. This trend could further impact investor confidence in holding JPY assets. The JPY exchange rate subsequently lacks support.
Geopolitics and Interest Rate Policies Support the USD—JPY Remains Weak in the Short Term
Wang pointed out that rising geopolitical risks in the Middle East drive safe-haven demand that consistently supports the USD. U.S. inflation risks also persist. The Federal Reserve maintains a cautious stance on rate cuts to keep the USD relatively strong. Until there is a clear shift in fundamentals, interest rate differentials, and the international financial landscape, the JPY is unlikely to reverse course in the near term. Markets must continue monitoring Japanese policy adjustments and global financial market developments.
Author: CIER Editorial Team
Date: July 23, 2026