Yen hits 40-year low; US warns Japan on currency swings, urges rate hikes

The Japanese yen has plunged to a 40-year low against the U.S. dollar, reaching 163.96 yen per dollar this week. The U.S. Treasury issued a warning, stating that the yen's excessive fluctuations are unwelcome, even as the interest rate gap between the U.S. and Japan narrows.

In its semi-annual monetary report, the U.S. Treasury called for the Bank of Japan to implement further interest rate hikes. The report noted that while nominal wages have risen, inflation has eroded household purchasing power. The Treasury believes that normalizing monetary policy would help stabilize inflation expectations and reduce excessive currency movements.

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monetary policy normalization will help stabilize inflation expectations and reduce excessive currency fluctuations.

The yen's sharp decline, which has seen its real effective exchange rate and its value against the dollar fall by 51% since late 2011, has led to its "severe undervaluation," according to the report. Despite market volatility and international factors like oil prices potentially influencing the yen, the U.S. remains concerned about its excessive depreciation.

The Bank of Japan has ended its long-standing quantitative easing program and raised interest rates multiple times, most recently to 1% in June, the highest in 31 years. However, investors remain cautious, partly due to concerns that Prime Minister Sanae Takaichi's government may resist further rate increases, despite signals from the central bank indicating more hikes could be coming.

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the yen's real effective exchange rate and its value against the dollar have depreciated by 51% from the end of 2011 to the end of April 2026, leading to a 'severe undervaluation' of the yen.