A rare joint U.S.-Japan currency intervention has helped lift the beleaguered yen off a 40-year low. Keeping it there could be an uphill battle.

The U.S.'s involvement in the intervention added heft to recent solo efforts by Japanese authorities that have managed to set a floor on the yen at around 160 per U.S. dollar, while failing to provide a lasting boost to the currency. Japan's finance minister on Monday said the country "would not hesitate" to intervene again alongside the U.S.

Even with U.S. support, analysts said the yen could struggle again absent a shift by Japan's central bank. Despite facing above-target inflation, the Bank of Japan has been careful about raising interest rates after decades of battling the opposite risk: deflation. The caution has pushed investors into other currencies where they can earn higher returns on short-term bonds.

Right now, short-term rates are set about 2.5 percentage points higher in the U.S. than in Japan, and many investors are expecting the Federal Reserve to raise rates further at its next meeting in September.

In afternoon trading Monday, the yen was hovering around 157 to the dollar, bouncing back from a pre-intervention low of almost 164 -- the weakest the currency had been since 1986.

"If we don't have monetary policy tightening from the Bank of Japan, the yen will not sustain the movement upward," said Nabil Milali, a portfolio manager at Edmond de Rothschild.

Despite falling around 0.2% against the yen, the dollar was broadly stable Monday, posting gains against the currencies of oil-producing countries like Norway and Canada, as hopes for a new U.S.-Iran peace deal drove down oil prices.

Stocks surged, with the Dow Jones Industrial Average rising 1.3% to a new record of 53178.41, the S&P 500 advancing 1.5% and the Nasdaq composite jumping 2.1%. The WSJ Dollar Index ticked up 0.1% in afternoon trading to 96.19.

Currency interventions by governments often have greater impacts over the short-term than the long-term, as economic fundamentals reassert themselves. In October, the U.S. also stepped in to strengthen the Argentine peso, succeeding in stopping a sharp slide in the currency. But the peso has since depreciated again, falling back to pre-intervention levels.

The U.S. intervened in currency markets Friday by selling euros to buy yen, a move that avoided a direct weakening of the U.S. dollar. Treasury Secretary Scott Bessent, in a social-media post, also urged the Fed to "upsize" a facility that Japan can use to borrow dollars and buy its own currency. Bessent's counterpart, Satsuki Katayama, said Monday that Japan planned to use that facility rather than sell its Treasury holdings to finance future interventions.

Investors widely expect the Bank of Japan to raise rates in the months ahead after holding them steady last week. But the effect on the yen could be muted by the fact that the Bank of Japan is still buying about 2.5 trillion yen ($16 billion) worth of Japanese government bonds each month, which is holding down longer-term yields, said Robin Brooks, a senior fellow at the Brookings Institution.

"The whole framework is full of contradictions: On the one hand the BOJ is buying bonds, pushing long-term rates down, while the Ministry of Finance is intervening to strengthen the yen," he added.

Prime Minister Sanae Takaichi's plans to boost spending have also been weighing on the currency, according to some analysts. Analysts believe a more substantial source of support for the currency could come from domestic investors. Japanese investors bringing home some of the trillions of dollars they've invested abroad -- something the government wants to encourage them to do -- would be the "most powerful policy for influencing the currency over a long period of time," according to Goldman Sachs analysts.

A stronger yen could have implications for global financial markets. Low interest rates in Japan and the weakness of the yen have fueled the rise of so-called carry trades, where investors borrow yen to buy riskier assets ranging from U.S. tech stocks to the Mexican peso.

A reversal of such bets would ripple around the world. An unexpected jump in the yen in 2024 fueled a global market rout as investors unwound carry trades -- forcing them to sell their investments and buy back the yen. While markets have so far taken the yen's appreciation in stride, a larger rise in the yen could force investors to rethink carry trades that HSBC estimates total over $1 trillion.

"If you look at the last decades, the easiest carry trade was to borrow in Japan with zero percent interest rates and invest in any kind of [higher-yielding] assets," said Milali. "A lot of investors are clearly positioned for a continuation in this carry trade. And if we had a reversal in Japanese interest rates and the yen, it could be a huge risk for these investors."