Yen Weakens Against Recovering Dollar; Looks Fragile Under US-Japan Rate Differential

The dollar rallied over 75 pips against the yen from mid-158 region during early European trading on Monday, climbing to a new daily high and trading near 159.199. Despite the recent overall pullback in the dollar index, the yen has failed to benefit, instead continuing to soften under US-Japan rate differential pressure.

**Rate Gap Drives Carry Trades, Keeping Pressure on Yen**

Although the Bank of Japan has raised rates four times since ending negative interest rates, pushing its policy rate to 0.75%, the gap remains significant compared with the Federal Reserve's maintained target range of 3.50% to 3.75% for the federal funds rate. According to market analysis, this structural rate differential has directly fueled the continued expansion of carry trades—investors borrowing low-cost yen to convert into higher-yielding dollar assets to capture the spread, creating sustained selling pressure on the yen. Chicago Fed President Austan Goolsbee recently signaled a hawkish stance, stating outright that rate cuts could be delayed until 2027, further reinforcing expectations that the rate gap will be slow to narrow in the near term.

**Intervention Effects Fade Quickly; Fundamental Weakness Persists**

Although US and Japanese authorities previously intervened jointly in the currency market to support the yen, driving a sharp intraday appreciation of over 3% in a single session, market reaction was relatively muted, and the exchange rate quickly fell back below the 160 level. Multiple currency strategists noted that as long as the US-Japan rate differential remains elevated, any official intervention can only delay the decline, not alter the yen's weak fundamentals. Robin Brooks, an analyst at the Brookings Institution, believes the yen's weakness stems not from speculative funds deliberately shorting it, but from Japanese government bond yields being far below reasonable levels, with capital naturally flowing to higher-return markets—this is the fundamental reason for the yen's sustained pressure.

**Near-Term Direction Still Depends on Rate Differential Outlook**

The Bank of Japan's decision to hold rates steady after last week's policy meeting further reinforced market expectations that the rate gap will be slow to narrow in the near term. Looking ahead, whether the yen can stabilize and recover largely depends on whether energy prices fall sharply or US rates decline significantly, thereby narrowing the US-Japan rate differential. Until then, the yen is expected to remain in a weak position under rate differential pressure.