Article by Marco Fassina
If you have booked a holiday to Tokyo recently, you will know that Japan has gone on sale. Languishing near historic lows against both the euro and the U.S. dollar, a weak yen has fueled a travel boom. However, the sustained slump has triggered serious tensions in Tokyo, prompting Japanese yields to levels not seen in three decades.
At the end of July, the situation grew so tense that it triggered a rare event. The US Treasury and Japan's Ministry of Finance executed a coordinated market intervention to support the currency. It signaled to global markets that Washington and Tokyo agreed on one thing: the Yen’s decline had gone too far, threatening global financial stability.
Understanding Yen’s weakness requires looking at one of the main engines of global currency markets: interest rate differentials. Up until 2025, with 10-year US Treasuries paying over 4% while Japanese 10-year paying barely 1%, investors naturally flocked to the dollar. This differential fueled the well-known "carry trade". Investors borrowed money cheaply in Japan, sold those Yen, and bought higher-yielding foreign assets. Continuous selling pressure pushed the Yen down year after year.
From a fundamental perspective, the Yen looks cheap: the Purchasing Power Parity—the exchange rate that eliminates differences in price levels between countries—suggests fair value would stand around ¥97 per US dollar as of end 2025 (source: Bloomberg).
However, there are many countervailing forces adding complexity. On one hand, Japan is undergoing a corporate governance revolution. For years, Japanese companies were ill-famed for hoarding cash, ignoring minority shareholders. Recent reforms have changed the game, sparking a record rise in shareholder activism and pushing foreign ownership above one-third of the Japanese stock market. On the other hand, expansive fiscal policies fueled fears of a deteriorating fiscal outlook.
A weak Yen is problematic for the U.S.—Japan is the largest foreign holder of U.S. Treasuries. If the Yen continues to weaken, Japan faces increasing pressure to defend its currency by selling dollar assets and buying Yen, putting pressure on U.S. government bond yields. The last thing the U.S. wants is one of its largest foreign creditors becoming a ‘forced seller’ of U.S. Treasuries.
But why should Maltese investors care?
Decades of Japanese investments abroad mean capital flowing back home can jolt global markets. We saw this briefly during the August 2024 carry-trade unwinding, which triggered a sharp Nasdaq sell-off. Europe is also not immune: Japanese investors have reportedly been selling French bonds recently, adding to pressure on euro-area yields. This is not just a ‘Japan story’.
Surely, a weak Yen also creates domestic problems: Japan imports almost all its oil, gas, and food, and a weak currency forces the country to pay inflated prices. This "imported inflation" is pinching the pockets of Japanese consumers.
The Bank of Japan (BOJ) is fighting back. It raised interest rates out of negative territory, progressively taking its benchmark rate to 1.25%. Slowly, the interest rate gap between Japan and the West is narrowing.
With central banks intervening and interest rates rising, is the stage set for stabilization or even a sustained appreciation of the Yen?
Possibly, but not so fast. Predicting a sustained recovery for the Yen remains uncertain. The recent currency playbook—which relied almost entirely on tracking interest rate differentials—has weakened. The following chart shows the deteriorating influence of interest rate differentials over the currency pair:
Source: Bloomberg.
A look at the chart reveals how much the rules of the game have changed. During the post-pandemic inflation shock, the Fed aggressively hiked rates to fight inflation while Japan stood still. The widening interest rate differential acted like pure gravity, pulling the Yen into a sustained downtrend. Yet since mid-2025, a bizarre anomaly has emerged: even though the yield gap has substantially narrowed, the Yen has stubbornly refused to recover.
Coordinated intervention by U.S. and Japan may have put a floor under the currency, but it has not necessarily defeated the broader underlying market forces. As things stand, the Yen seems to be increasingly dependent on Japan’s fiscal outlook, leaving the currency and global markets trapped between a hawkish BOJ and Prime Minister Sanae Takaichi’s expansive policies.
Marco Fassina is a Research Analyst & Discretionary Portfolio Manager at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd, with registered address Finance House, Princess Elizabeth Street, Ta Xbiex, Malta XBX 1102, is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.