The Japanese yen's relentless depreciation over the past six months is causing its traditional status as a safe-haven currency to fade.

As June begins, the yen remains mired in devaluation, hitting its weakest level in half a century since Japan adopted a floating exchange rate system in 1973. Robin Brooks, a senior fellow at the Brookings Institution, has labeled the yen's performance over the past half-year as the "world's weakest currency."

Over the past week, the USD/JPY pair fluctuated persistently around the key psychological level of 160, briefly touching a five-week high of 160.395 on the 10th. This comes despite data from the Bank of Japan's accounts showing that at the end of April, the central bank deployed over ¥5 trillion in a market rescue attempt. However, even this record single intervention did little to sustainably boost the yen in the foreign exchange market.

From safe-haven asset to the world's weakest currency, what explains this dramatic reversal in the yen's fortunes?

Market Rescue Merely Buys Time

Norihiro Yamaguchi, Senior Japan Economist at Oxford Economics, recently commented on the latest market intervention by the Japanese government and central bank, stating that such government actions are merely temporary measures to buy time. He even suggested it would not be surprising if future information reveals similar interventions in May.

Between April 30 and the end of May, Japan's Ministry of Finance and the central bank utilized approximately ¥11.73 trillion to try and curb the yen's rapid depreciation against the dollar. While the intervention initially caused the yen to appreciate by 1.8% in a single day, pulling the exchange rate back from a high of 160.70 to the 155-156 range, the effect faded quickly. Within two weeks, the rate had fallen back to the 159-160 range, showing clear diminishing marginal returns.

"It is difficult to reverse market trends without a change in fundamentals," Yamaguchi analyzed. "Although speculative short yen positions decreased after the intervention, they have recently increased rapidly again, leading to yen depreciation." He emphasized that a series of economic indicators point to a sustained U.S. economic recovery, coupled with a widening yield gap between the U.S. and Japan, which is driving yen weakness and dollar strength. "Recently, in our view, increased uncertainty over Japan's domestic fiscal policy outlook has exacerbated this trend of yen weakness."

In early June, Japan's House of Councillors swiftly passed a supplementary budget totaling ¥3.1135 trillion. While ostensibly aimed at "addressing prolonged Middle East tensions," this budget is essentially an emergency economic measure by the government to alleviate domestic inflationary pressure and subsidize livelihoods. However, its complete reliance on deficit-covering bond issuance and its potential to exacerbate yen depreciation have raised deep concerns about the sustainability of Japan's fiscal path.

Unlike past short-term fluctuations in the yen, Yamaguchi highlighted the significant influence of U.S. factors, such as the U.S. economic recovery, the market's repricing of Federal Reserve policy prospects, and the widening U.S.-Japan yield differential. These elements have collectively undermined the effectiveness of Japan's market rescue efforts.

The sharp yen depreciation is now having multiple negative impacts on the Japanese economy. Beyond pushing up import prices and driving domestic inflation, analysis suggests that due to the transfer of production capacity overseas, the weak yen is not effectively boosting exports. Instead, it is further increasing production and operating costs for Japanese companies, squeezing profit margins for domestic firms, while the economic pressure from imports is more pronounced than before.

When Will the Bottom Be Reached?

The Bank of Japan has scheduled its monetary policy meeting for June 15th and 16th, with the final decision on whether to raise interest rates to be announced on the 16th. Having chosen to hold rates steady in previous meetings this year, the June meeting is being watched with heightened expectations.

Yamaguchi stated that, according to Oxford Economics' analysis, a 25 basis point rate hike by the Bank of Japan is almost certain, and the market has already priced in this expectation.

Currently, market expectations for a BoJ rate hike are as high as 88%. An adjusted policy rate would mark Japan's highest level in nearly 31 years, representing a key step in the central bank's continued monetary tightening following its exit from negative interest rate policy. "The market is more focused on how the Bank of Japan will communicate the pace of subsequent rate hikes," Yamaguchi said. "We believe the Bank of Japan is unlikely to provide specific information on the timing and magnitude of future hikes to avoid antagonizing the government and to leave itself room for maneuver."

Yamaguchi also noted that, based on comments likely to be made by BoJ Deputy Governor Uchida at the post-meeting press conference on the 16th, the yen could face renewed pressure.

Regarding key future levels for the yen in the forex market, Yamaguchi indicated that breaching the 161 yen per dollar level could remain a significant psychological barrier for the market, recalling a high from July 2024. "At the same time, the current existence of speculative short yen positions means that if these positions are unwound rapidly, the yen could also experience a sharp appreciation."