The Japanese yen has dropped to a 40-year low against the US dollar, putting investors on watch for potential government intervention by Japan that could ripple through US stocks, the Treasury market, and the broader global economy. The yen’s decline to its lowest level since 1986 has been fueled by a recent shift in expectations for US interest rates, largely due to the war with Iran, and a rebound in the dollar.

Impact on the US Economy

The US Federal Reserve’s likely decision to hold rates steady or increase them in the coming months to combat inflation spurred by the oil shock from the US-Iran war has led to a strengthening of 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.

Currencies typically rise and fall based on differences in interest rates in different countries. The Bank of Japan on June 16 raised its benchmark interest rate to 1% – the highest level since the 1990s. However, the BOJ’s interest rate is still considerably lower than that of the Fed, which in June held its rate steady at a range of 3.5% to 3.75%.

The gap is pushing 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.

Potential Government Intervention

The Japanese government could boost its currency by selling US dollars or assets denominated in dollars, like US Treasuries, and then buying yen. Intervention could come as soon as this weekend, according to some analysts.

A jump in the yen could move financial markets by putting pressure on the dollar and Treasuries. The government has intervened in markets before – as recently as earlier this year. Japan sold about $70 billion in assets in late April and early May in an effort to boost the yen, but the intervention failed to address the underlying problems.

Original reporting: KEYT (Ventura/Santa Barbara) — read the source article.