In current months, the mainstream media commentators have been issuing growing lurid predictions of how the ‘uncontrolled’ fiscal state of affairs in Japan is killing the yen and a full-scale foreign money disaster was imminent, after the yen moved throughout the ‘fabled’ 160 mark in opposition to the US greenback. What’s ‘fabled’ about that threshold is anybody’s guess, however mainstream economists and their mouthpieces within the press like to give you catastrophe thresholds that generate headlines. There’s nothing important about 160. Final Tuesday (September 1, 2026), the yen reached 160.20. On the time of writing, the yen was sitting on 155.95 to the US greenback. Why is the yen appreciating once more? And why have the short-sellers develop into very cautious? Particularly, because the Takaichi authorities is clearly intent on pushing forward with the slightly important fiscal growth, which the mainstream assume will kill the foreign money. This submit argues that the yen dynamics have little actually to do with fiscal coverage settings. Different components are extra important and infrequently mirror the skittishness of the monetary markets chasing revenue wherever they will discover it. The commentators and the monetary market spokespersons may declare the dynamics are all about extreme authorities debt and all that political stuff, however the actuality could be very totally different. As you have been!
To place the 160 mark into perspective, between January 1957 and September 1985 (the latter date being when the US bullied Japan into signing the Plaza Accord), the yen averaged 310.2 in opposition to the US greenback.
It reached a most of 362.9 throughout this era within the months of July and August 1963.
Following the signing of the Plaza Accord in September 1985, which was a plan by the US to scale back its exterior deficit and which compelled Japan to understand, the yen moved from 237.2 in September 1985 to 214.9 in October 1985.
The yen continued to understand and in December 1986 it dropped under the 160 mark and stayed under that mark for the subsequent 448 months, with one exception.
Within the wake of the collapse of the asset worth bubble in 1990 and 1991 it did hit 160.15 on April 2, 1990
On April 29, 2024, it rose above the 160 mark for a second (160.03) and the hysteria started.
From June 27, 2024 to July 11, 2024, it remained above the 160 mark.
Then on June 5, 2026, there was one other run of days above 160.
The every day common for June 2026 was 160.68, July 2026 162.53, August 2026 158.8.
In every of the durations that the yen has gone above 160 because the Plaza Accord was signed, economists and the supporting media have issued predictions of doom.
All of them declare in varied ways in which the depreciating yen is a direct assertion by non-public foreign money traders in regards to the fiscal place of the Japanese authorities.
Apparently, the federal government deficit is extreme and the federal government will run out of yen to spend as a result of the bond markets would require more and more greater yields to soak up the chance of presidency insolvency.
All that type of nonsense.
After which, as day follows evening, the yen begins to understand once more.
Rinse and repeat.
Here’s a graph of the month-to-month values from January 1975 as much as the tip of July 2026
I’ve already written in regards to the depreciating yen from an Trendy Financial Principle (MMT) perspective.
For instance:
1. Depreciating yen – look past the plain for the reason (July 6, 2026).
2. Japan’s Authorities Pension Funding Fund and the yen – mainstream macro myths driving dangerous coverage (February 2, 2026).
3. A decrease yen will not be inflationary as soon as the changes are absorbed (December 8, 2025).
4. Discuss of a Plaza Accord 2.0 ought to heed the teachings of Plaza Accord 1.0 (December 1, 2025).
I gained’t repeat the small print in these posts besides to summarise on this approach:
1. The behaviour of the – 年金積立金管理運用独立行政法人 (Authorities Pension Funding Fund) – which is the ‘largest pool of retirement financial savings on the planet’ (Supply) is important.
In recent times, the GPIF has shifted its funding portfolio considerably in the direction of overseas bonds and shares (the development began submit 2010).
This shift to overseas investments in pursuit of upper returns has led to a major promoting of yen by the GPIF to buy the overseas property.
The outcome? A major power for yen depreciation.
All pushed by the claims that the pension fund would run out of cash (because of the ageing society) and the federal government wouldn’t be capable of present the yen to fill the hole.
2. What in regards to the failure of the Financial institution of Japan to match the rate of interest will increase by central banks elsewhere?
The declare is that the differential motivates traders to borrow yen (on the decrease charges) and purchase overseas property delivering greater returns.
The provision of yen into the overseas change market then outstrips the expansion in demand and the yen depreciates.
There is no such thing as a doubt that this so-called ‘carry commerce’ has some half to play.
However how does one clarify the durations of appreciation when the Financial institution of Japan held charges at zero (and damaging) and there was a persistent rate of interest differentials with the US?
3. Extra related to current yen dynamics have been the behaviour of repatriations.
within the aftermath of the Nice East Japan Earthquake, the yen appreciated additional as a result of everybody anticipated there can be giant overseas asset repatriations by insurance coverage firms.
Importantly, the conduct of financial and financial coverage then in Japan was not a lot totally different to now.
Why did the yen depreciate between between November 2011 and August 2015 after a protracted interval of appreciation?
And why did it begin appreciating once more as much as the interval when the central financial institution rate of interest differentials started to widen due to the totally different responses to the inflationary pressures?
The clue is that internet exports went into deficit in mid-2011, as exports progress faltered, and didn’t return to surplus once more till the September-quarter 2016.
It was commerce actions that drove these change fee adjustments.
All by means of these episodes, there have been steady Japanese fiscal deficits, a rising public debt ratio, a zero-interest fee financial coverage, and huge quantitative easing purchases of presidency debt.
4. What the carry commerce story misses is the totally different charges of funding exercise within the US and Japan at current.
Within the March-quarter 2026, Gross non-public funding within the US grew by (a staggering) 7.9 per cent reflecting the wild spending on AI and information centres – non-public enterprise spending on tools rose by 15.8 per cent.
The AI dream spawned a large rise in International Direct Funding into the US, completely unrelated to the fiscal state of affairs in Japan.
The FDI pushed up the US greenback and contributed to the yen depreciation.
The widow maker is again
The widow-maker commerce is a cute expression that describes the losses which have traditionally arisen when bond merchants brief promote the Japanese Authorities Bonds (‘shorting’ is bond worth) within the hope that bond costs will fall and yields will rise.
The mechanism is as follows:
1. Speculator finds a holder of JGBs who is ready to mortgage them for a specified interval – the contract time period.
2. The speculator then sells the borrowed bonds within the ‘spot’ market on the present worth (betting that the value will fall over the contract time period).
3. The speculator now holds the liquidity (money) and waits till the time that the contract must be honoured – that’s, the date they’ve to present the JGBs again to the lender.
4. At that date, they need to ship the bonds again and so they hope they will reenter the ‘spot’ market once more and purchase the required amount with the money they’re holding at a cheaper price than earlier than – thus making a revenue.
5. Huge losses often happen!
Why?
As a result of the Financial institution of Japan has commonly functioned as an infinite purchaser of bonds to maintain yields low – thus stopping the bond costs from falling.
There’s different facets to this that I gained’t go into right here – reminiscent of ‘damaging carry’ – that reinforce the losses.
The opposite actuality is that the speculators hardly ever bought ‘bodily’ bonds in these brief promoting ventures.
They principally used the futures market to promote JGBs at a later date within the derivatives market.
The identical expectation applies – they’re liable to ship JGBs that they don’t at present personal and hope by the date of supply they are going to be capable of buy them within the spot market at a cheaper price than specified within the contract.
The most recent dynamic is working in opposition to the brief sellers.
The yen is beginning to recognize once more even because the Takaichi authorities is pushing forward with a major (however not giant sufficient) fiscal growth to underwrite the general public infrastructure program and break the deflationary mindset that has crippled the non-public sector.
First, there was the official intervention by the Financial institution of Japan (with participation from the US authorities).
The next graph exhibits the every day Financial institution of Japan purchases of yen in opposition to the USD (in 100 Million yen items) since January 2022.
There have been 4 durations the place such intervention has occurred.
The said purpose to stabilise the yen – the Financial institution of Japan makes use of its overseas foreign money reserves to buy yen within the open overseas change market thus pushing up demand for the foreign money and its worth.
However there are different components concerned that basically are way more vital than the official intervention in swinging the foreign money again right into a strengthening section.
Second, important repatriation of capital is happening to make the most of the upper bond yields now on provide.
Third, extra particularly, the stress on the GPIF to shift funds again into home property has led to non-public speculators promoting overseas currency-denominated bonds and shifting again into the JGB market.
Whereas some are claiming that the expectation that the Financial institution of Japan will improve rates of interest quickly is driving a reversal of carry trades, which has some fact to it, these repatriations are a extra important issue.
Japanese speculators are actually shifting again into home property at a speedy tempo and liquidating their overseas property as a part of this shift.
The brief sellers are actually busily decreasing their publicity and the impression has been to extend the yen change fee, significantly in opposition to the US greenback.
In the meantime, there is no such thing as a trace that the Japanese authorities will pursue fiscal austerity, regardless of the calls from mainstream economists that the foreign money depreciation displays, of their phrases, the ‘parlous’ debt place of the federal government.
Conclusion
What all this could inform you of is that the yen dynamics have little actually to do with fiscal coverage settings.
Different components are extra important and infrequently mirror the skittishness of the monetary markets chasing revenue wherever they will discover it.
The commentators and the monetary market spokespersons may declare the dynamics are all about extreme authorities debt and all that political stuff, however the actuality could be very totally different.
As you have been!
That’s sufficient for as we speak!
(c) Copyright 2026 William Mitchell. All Rights Reserved.
