Despite Japan spending ¥15.4 trillion ($96.4 billion) in one month to support the yen, direct intervention remains a temporary solution that does not address the interest rate gap. Low rates reduce the appeal of assets, while raising them increases costs for households and businesses, confirming that interest rates are the key driver

Amid economic uncertainty and persistent pressure on exchange rates, the experience of the Japanese yen reveals the practical limits of direct intervention in currency markets. Data showed that Japan injected approximately ¥15.4 trillion (equivalent to $96.4 billion) over a single month in an attempt to curb the currency’s decline, yet the yen remained under pressure.

This divergence stems from the structural differences between monetary policy tools:

  • Foreign exchange market intervention: This addresses only the outcome by buying yen to increase demand and temporarily support its value, but it carries a high cost and its effect ends as soon as the purchases stop.
  • Raising interest rates: This addresses the root causes by narrowing the interest rate gap between the yen and other currencies, increasing the returns and appeal of Japanese assets and reducing incentives to sell the currency.

Japan’s dilemma over raising interest rates:

Japan faces a complex trade-off: raising interest rates supports the currency and narrows the gap, but increases financing costs for households and businesses while weakening investment and economic activity. Conversely, keeping rates low widens the gap and increases downward pressure on the yen.

The strategic conclusion:

The yen’s experience confirms that directly defending a currency through the foreign exchange market may change its value temporarily, but remains a costly solution when underlying economic fundamentals continue to exert pressure. Ultimately, the most important figure behind the exchange rate is the interest rate.