The Tamesis
Of all the signs of trouble in the global financial system, the yen’s weakness during the crisis deserves mention.
For two decades, the yen has been a reliable safe haven in global troubles. The rapidly growing fallout from U.S. and Israeli attacks on Iran should cause the yen to surge along with the dollar. However, the yen’s fall to 160 levels has Tokyo officials busy hinting at action.
On Monday, Japan’s top monetary official Atsushi Mimura warned speculators not to test the Ministry of Finance, a clear hint that currency intervention may be coming.
“We are hearing more and more concerns that speculation is intensifying not only in the crude oil futures market but also in the foreign exchange market,” Mimura told reporters. “If this situation continues, we believe decisive action may be needed soon.”
Perhaps more interesting is why the yen is falling as people seek safety. Something to do with Japan and its fragile finances? Or does it have to do with central banks and investors collectively deciding that the U.S. dollar is the only safe place for capital right now?
Even more interesting: There are many reasons why the dollar fell out of favor. These include the U.S. national debt approaching $40 trillion, rising inflation, Trump’s erratic tariff policy and attacks on the Federal Reserve’s independence. Still, the dollar’s rise reminds gold bulls that U.S. government assets are a hard habit to break for many.
But what if the downgrade of the yen as a safe-haven instrument has something to do with Tokyo’s current policy mix? If Japanese Prime Minister Sanae Takaichi’s team doesn’t raise the issue and internalize it, the yen note will be in trouble.
A big problem, of course, is Tokyo’s massive debt load – by far the largest in the developed world. Before and after Takaichi became prime minister in October last year, he publicly expressed his determination to reduce taxes. This idea of adding new debt has clashed with bond markets in recent months. Earlier this year, the 10-year bond yield rose to its highest level since 1999.
As this happens, traders fear Japan will have its own “Liz Truss moment.” This refers to 2022, when then-UK Prime Minister Truss caused the bond market to collapse by passing an unfunded tax cut plan.
In May 2025, Shigeru Ishiba, the predecessor of the first year of high school, shocked the world by saying that Tokyo’s finances were “worse than Greece.” All of this complicates the city’s hopes for tax cuts in tantalizing ways — and in real time. As oil prices top $110 a barrel, things get even more dangerous.
Another possible reason why the yen isn’t rising: Traders are betting that Tokyo will do whatever it takes to push the yen lower again. Although Japan’s two decades of yen weakness are now widely seen as having backfired, neither Koichi nor her Liberal Democratic Party appear to have other plans.
Takaichi has been outspoken in her preference for a weaker yen to boost exports. This may at least partially explain why the Bank of Japan is determined not to continue raising interest rates this year.
However, a fall below 160 yen to the dollar could trigger a deeper plunge. In addition to infuriating Trump World, a lower exchange rate could upend the so-called “yen carry trade” in chaotic ways.
In 1999, the Bank of Japan became the first major central bank to cut interest rates to zero. It’s basically been stuck there ever since. In December, the Bank of Japan raised interest rates to 0.75%, a 30-year high. Now, as Japan grapples with stagflation, the Bank of Japan doesn’t know whether the next rate adjustment will be higher or lower. The inflation rate in 2025 is twice the GDP growth rate of 1.1%.
All of this has left the yen in a state of instability that Tokyo officials are not accustomed to. One can only hope that the high school team is investigating why the yen sells off during times of crisis.
