Japanese Yen Hits 40-Year Low Against US Dollar: What It Means for Global Markets and the Naira

The Japanese yen has dropped to its lowest level against the US dollar since 1986, putting investors on watch for possible government intervention that could ripple through US stocks, Treasury markets, and the broader global economy. The yen's decline has been fueled by shifting expectations for US interest rates, partly driven by the war with Iran, and a strong rebound in the dollar.

Why the Yen Is Sinking

Traders are betting the US Federal Reserve will hold rates steady or even increase them in the coming months to combat inflation spurred by the oil shock from the US-Israeli war with Iran. That shift in the Fed's outlook has strengthened the dollar, putting pressure on the yen and other currencies. The US dollar index is up 3% this year, rebounding after tumbling 9% in 2025.

"The energy price shock triggered by the US-Iran war has been the last catalyst for a weaker yen, which has been reinforced by the recent hawkish shift in Fed policy communication," Lee Hardman, senior currency economist at MUFG, said in an email.

Currencies typically rise and fall based on interest rate differences between countries. The Bank of Japan on June 16 raised its benchmark rate to 1%, the highest level since the 1990s. But that rate is still much lower than the Fed's, which held its rate steady in June at a range of 3.5% to 3.75%. That gap pushes money towards the US and away from Japan as investors chase better returns, strengthening the dollar and pushing the yen lower while increasing volatility across global markets.

The Supreme Court on Monday ruled that President Donald Trump cannot fire Fed Governor Lisa Cook without evidence of wrongdoing, bolstering the central bank's independence. The Fed's assertive stance on inflation and the reinforcement of its independence have supported the dollar and pushed the yen lower.

What a Weak Yen Means for Japan

Japan had extraordinarily low interest rates – zero to negative – across the 2000s and 2010s to juice the economy and prevent deflation after a severe recession in the 1990s. In 2024, the BOJ began raising rates as inflation rose above its 2% target. But the yen has continued to decline because Japan's rates remain lower than the rest of the world.

A runaway slide in the currency, paired with stubborn inflation, could spark an economic crisis. A weaker currency makes imported goods more expensive, and Japan imports much of its food and energy. The US-Israeli war with Iran and the surge in oil prices have hit Asian economies reliant on Middle Eastern oil.

"Japanese officials have made it clear that the weak yen poses a threat to import costs and Japan's cost of living crisis, which has been a key topic for the electorate," Chris Turner, global head of markets at ING, said in a note.

How Japanese Intervention Could Affect US Markets

The Japanese government could boost the yen by selling US dollars or dollar-denominated assets like US Treasuries and buying yen. Intervention could come as soon as this weekend, according to Turner at ING. A jump in the yen could pressure the dollar and Treasuries, moving financial markets.

Japan sold about $70 billion in assets in late April and early May to boost the yen, according to ING. That intervention had minimal impact on US markets but failed to fix the underlying problems. If Japan sells more of its US Treasury holdings, it could push yields higher. Yields rise when bond prices fall.

Analysts say the overall effect would be modest given the size of the US bond market. "Japanese currency intervention efforts are typically conducted at a scale far too small — tens of billions against roughly $29 trillion in marketable Treasuries — to have a material impact on US yields," Karl Schamotta, chief market strategist at Corpay, said in an email.

For stocks, there are implications. A popular Wall Street trade involves borrowing yen to invest in US stocks, affordable because of the BOJ's history of near-zero rates. But if the yen spikes due to intervention while the BOJ is raising rates, borrowing becomes more expensive. That could unwind the so-called "carry trade," forcing traders to sell stocks to repay loans.

"A 'shock and awe' campaign involving much larger trading volumes, especially if coordinated with the US Treasury, could trigger a violent unwind in the carry trade, with severe negative implications for US equity markets," Schamotta added. In August 2024, an unwinding of the carry trade sparked by the BOJ raising rates led to a sharp sell-off in US stocks, especially tech stocks.

What This Means for the Naira and Nigerian Businesses

A stronger dollar driven by the yen's weakness and Fed policy puts additional pressure on emerging market currencies like the naira. Nigeria, which imports heavily and faces its own foreign exchange shortages, could see the naira come under further strain as global capital flows favour the US. Nigerian businesses relying on imports may face higher costs if the dollar strengthens further, while the Central Bank of Nigeria may find it harder to defend the naira without depleting reserves.