Japan's elimination from the FIFA World Cup after a loss to Brazil is certainly disappointing, but for Tokyo, that's nowhere near the biggest concern.
A far more pressing issue is that the Japanese currency has fallen below the ¥162 per U.S. dollar (USD/JPY rate), even though the Bank of Japan raised its key interest rate from 0.75% to 1.0% on June 16 — the highest level in 31 years — and spent 11.7 trillion yen on currency interventions in April and May.
Why does the yen keep falling?
For starters, interest rates remain significantly higher in the U.S. than in Japan. That makes the yen the funding currency of choice for carry trades, where investors borrow cheaply in yen and invest in higher-yielding assets abroad.
That's also why currency interventions have had little effect. They can slow the decline, but they can't reverse a trend driven by fundamentals. Thus, even if Japanese authorities step back into the market tomorrow, the outcome is likely to be the same.
The yen is also being hurt by a stronger U.S. dollar.
Markets are increasingly pricing in tighter Federal Reserve policy as higher energy prices keep inflation elevated and the U.S. economy continues to show resilience. Japan, by contrast, cannot raise interest rates aggressively due to its high public debt, which would heavily strain government finances.
At the same time, easing geopolitical risks reduces demand for safe-haven currencies like the yen.
Putting it all together, there is a low chance of a sustained recovery of the Japanese currency in the near term unless there is coordinated intervention by the U.S.
Why would Washington get involved?
Because a persistently weak yen could speed up selling pressure in Japanese government bonds. That could push Japan to offload some of its huge U.S. Treasury holdings to stabilize domestic markets or defend the currency, thereby putting upward pressure on U.S. yields.
Now, if the U.S. once again refuses to step in, as it did in January, the yen may pause for a while, but its broader downtrend could continue. The good news is that a weaker yen makes Japan a lot cheaper to visit. So if you've been thinking about a trip to Japan, this might be a good time to start looking at flights.