The yen’s latest decline comes despite several developments that would normally support the currency.

Japan and the United States recently coordinated efforts to stabilise the yen, producing a sharp but temporary rally. USD/JPY subsequently moved from near 164 toward approximately 155.

However, the recovery did not last.

By September 1–2, USD/JPY had returned to around 160. There are several reasons.

1. The US-Japan Interest Rate Gap Remains Large

Interest-rate differentials remain one of the biggest structural drivers of USD/JPY.

The US still offers substantially higher interest rates than Japan, encouraging investors to hold US-dollar assets or use the yen as a funding currency.

Even though the BoJ is gradually tightening monetary policy, markets continue to view the normalisation process as relatively slow compared with the level of US rates.

This means that yen carry trades remain attractive, particularly when investors expect the US dollar to remain strong.

2. The BoJ Has Not Yet Delivered the Rate-Hike Cycle Markets Want

The BoJ has raised rates during its normalisation process, but policymakers remain cautious because Japan has a very large government debt burden and economic growth remains relatively fragile.

Japanese 10-year government bond yields recently approached 3%, their highest level in decades, highlighting how quickly financial markets are repricing Japanese monetary policy.

The problem for the yen is that expectations alone may not be enough.

Markets increasingly want evidence that the BoJ is prepared to raise rates more frequently.

Reuters reported in August that the BoJ was considering a September rate hike and potentially a faster pace of tightening thereafter.