Yen starts to appreciate again – as you were!

In recent months, the mainstream media commentators have been issuing increasing lurid predictions of how the ‘out of control’ fiscal situation in Japan is killing the yen and a full-scale currency crisis was imminent, after the yen moved across the ‘fabled’ 160 mark against the US dollar. What is ‘fabled’ about that threshold is anyone’s guess, but mainstream economists and their mouthpieces in the press love to come up with disaster thresholds that generate headlines. There is nothing significant about 160. Last Tuesday (September 1, 2026), the yen reached 160.20. At the time of writing, the yen was sitting on 155.95 to the US dollar. Why is the yen appreciating again? And why have the short-sellers become very wary? Especially, as the Takaichi government is clearly intent on pushing ahead with the rather significant fiscal expansion, which the mainstream think will kill the currency. This post argues that the yen dynamics have little really to do with fiscal policy settings. Other factors are more significant and often reflect the skittishness of the financial markets chasing profit wherever they can find it. The commentators and the financial market spokespersons might claim the dynamics are all about excessive government debt and all that political stuff, but the reality is very different. As you were!

To put 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 against the US dollar.

It reached a maximum of 362.9 during this period in 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 reduce its external deficit and which forced Japan to appreciate, the yen moved from 237.2 in September 1985 to 214.9 in October 1985.

The yen continued to appreciate and in December 1986 it dropped below the 160 mark and stayed below that mark for the next 448 months, with one exception.

In the wake of the collapse of the asset price 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 moment (160.03) and the hysteria began.

From June 27, 2024 to July 11, 2024, it remained above the 160 mark.

Then on June 5, 2026, there was another run of days above 160.

The daily average for June 2026 was 160.68, July 2026 162.53, August 2026 158.8.

In each of the periods that the yen has gone above 160 since the Plaza Accord was signed, economists and the supporting media have issued predictions of doom.

They all claim in various ways that the depreciating yen is a direct statement by private currency investors about the fiscal position of the Japanese government.

Apparently, the government deficit is excessive and the government will run out of yen to spend because the bond markets will require increasingly higher yields to absorb the risk of government insolvency.

All that sort of nonsense.

And then, as day follows night, the yen starts to appreciate again.

Rinse and repeat.

Here is a graph of the monthly values from January 1975 up to the end of July 2026

I have already written about the depreciating yen from an Modern Monetary Theory (MMT) perspective.

For example:

1. Depreciating yen – look beyond the obvious for the explanation (July 6, 2026).

2. Japan’s Government Pension Investment Fund and the yen – mainstream macro myths driving bad policy (February 2, 2026).

3. A lower yen is not inflationary once the adjustments are absorbed (December 8, 2025).

4. Talk of a Plaza Accord 2.0 should heed the lessons of Plaza Accord 1.0 (December 1, 2025).

I won’t repeat the details in those posts except to summarise in this way:

1. The behaviour of the – 年金積立金管理運用独立行政法人 (Government Pension Investment Fund) – which is the ‘largest pool of retirement savings in the world’ (Source) is significant.

In recent years, the GPIF has shifted its investment portfolio significantly towards foreign bonds and shares (the trend started post 2010).

This shift to foreign investments in pursuit of higher returns has led to a significant selling of yen by the GPIF to purchase the foreign assets.

The result? A significant force for yen depreciation.

All driven by the claims that the pension fund would run out of money (due to the ageing society) and the government would not be able to provide the yen to fill the gap.

2. What about the failure of the Bank of Japan to match the interest rate increases by central banks elsewhere?

The claim is that the differential motivates investors to borrow yen (at the lower rates) and buy foreign assets delivering higher returns.

The supply of yen into the foreign exchange market then outstrips the growth in demand and the yen depreciates.

There is no doubt that this so-called ‘carry trade’ has some part to play.

But how does one explain the periods of appreciation when the Bank of Japan held rates at zero (and negative) and there was a persistent interest rate differentials with the US?

3. More relevant to recent yen dynamics have been the behaviour of repatriations.

in the aftermath of the Great East Japan Earthquake, the yen appreciated further because everyone expected there would be large foreign asset repatriations by insurance companies.

Importantly, the conduct of monetary and fiscal policy then in Japan was not much different to now.

Why did the yen depreciate between between November 2011 and August 2015 after a long period of appreciation?

And why did it start appreciating again up to the period when the central bank interest rate differentials began to widen because of the different responses to the inflationary pressures?

The clue is that net exports went into deficit in mid-2011, as exports growth faltered, and did not return to surplus again until the September-quarter 2016.

It was trade movements that drove these exchange rate changes.

All through these episodes, there have been continuous Japanese fiscal deficits, a rising public debt ratio, a zero-interest rate monetary policy, and large quantitative easing purchases of government debt.

4. What the carry trade story misses is the different rates of investment activity in the US and Japan at present.

In the March-quarter 2026, Gross private investment in the US grew by (a staggering) 7.9 per cent reflecting the wild spending on AI and data centres – private business spending on equipment rose by 15.8 per cent.

The AI dream spawned a massive rise in Foreign Direct Investment into the US, totally unrelated to the fiscal situation in Japan.

The FDI pushed up the US dollar and contributed to the yen depreciation.

The widow maker is back

The widow-maker trade is a cute expression that describes the losses that have historically arisen when bond traders short sell the Japanese Government Bonds (‘shorting’ is bond price) in the hope that bond prices will fall and yields will rise.

The mechanism is as follows:

1. Speculator finds a holder of JGBs who is prepared to loan them for a specified period – the contract term.

2. The speculator then sells the borrowed bonds in the ‘spot’ market at the current price (betting that the price will fall over the contract term).

3. The speculator now holds the liquidity (cash) and waits until the time that the contract has to be honoured – that is, the date they have to give the JGBs back to the lender.

4. At that date, they have to deliver the bonds back and they hope they can reenter the ‘spot’ market again and buy the required quantity with the cash they are holding at a lower price than before – thus making a profit.

5. Massive losses usually occur!

Why?

Because the Bank of Japan has regularly functioned as an unlimited buyer of bonds to keep yields low – thus preventing the bond prices from falling.

There is other aspects to this that I won’t go into here – such as ‘negative carry’ – that reinforce the losses.

The other reality is that the speculators rarely purchased ‘physical’ bonds in these short selling ventures.

They mostly used the futures market to sell JGBs at a later date in the derivatives market.

The same expectation applies – they are liable to deliver JGBs that they do not currently own and hope by the date of delivery they will be able to purchase them in the spot market at a lower price than specified in the contract.

The latest dynamic is working against the short sellers.

The yen is starting to appreciate again even as the Takaichi government is pushing ahead with a significant (but not large enough) fiscal expansion to underwrite the public infrastructure program and break the deflationary mindset that has crippled the private sector.

First, there was the official intervention by the Bank of Japan (with participation from the US government).

The following graph shows the daily Bank of Japan purchases of yen against the USD (in 100 Million yen units) since January 2022.

There have been four periods where such intervention has occurred.

The stated aim to stabilise the yen – the Bank of Japan uses its foreign currency reserves to purchase yen in the open foreign exchange market thus pushing up demand for the currency and its price.

But there are other factors involved that really are much more important than the official intervention in swinging the currency back into a strengthening phase.

Second, significant repatriation of capital is occurring to take advantage of the higher bond yields now on offer.

Third, more specifically, the pressure on the GPIF to shift funds back into domestic assets has led to private speculators selling foreign currency-denominated bonds and shifting back into the JGB market.

While some are claiming that the expectation that the Bank of Japan will increase interest rates soon is driving a reversal of carry trades, which has some truth to it, these repatriations are a more significant factor.

Japanese speculators are now shifting back into domestic assets at a rapid pace and liquidating their foreign assets as part of this shift.

The short sellers are now busily reducing their exposure and the impact has been to increase the yen exchange rate, particularly against the US dollar.

Meanwhile, there is no hint that the Japanese government will pursue fiscal austerity, despite the calls from mainstream economists that the currency depreciation reflects, in their words, the ‘parlous’ debt position of the government.

Conclusion

What all this should inform you of is that the yen dynamics have little really to do with fiscal policy settings.

Other factors are more significant and often reflect the skittishness of the financial markets chasing profit wherever they can find it.

The commentators and the financial market spokespersons might claim the dynamics are all about excessive government debt and all that political stuff, but the reality is very different.

As you were!

That is enough for today!

(c) Copyright 2026 William Mitchell. All Rights Reserved.