Understanding the Structure of the Yen, Won, and Dollar Through the History of Currency Intervention

An exchange rate is the relative price of two currencies. Therefore, it is difficult to reliably predict its direction based only on one country’s interest rates or economy. This is because central bank policies, government intervention in foreign exchange markets, trade and capital flows, geopolitical shocks, and investor positioning all influence one another.

This article does not provide real-time exchange rate targets. Instead, it connects Japan’s intervention history, the Bank of Japan’s policy constraints, the yen carry trade, and the determinants of the won-dollar exchange rate to explain which claims can be trusted.

Why Exchange Rates Are Difficult to Predict

The main reason exchange rates are difficult to predict is that markets price in expectations about future policies before current economic indicators. Even when the same inflation data is released, the exchange rate may move in the opposite direction depending on whether the market had already anticipated it and whether the central bank’s response is expected to change.

Key Variables That Move Exchange Rates

Interest rate differentials are an important variable, but they are not a stand-alone formula. For example, even if U.S. interest rates are higher than South Korea’s, the won may strengthen if rapid U.S. rate cuts are expected or if South Korea’s exports and current account improve significantly.

History and Facts of Japan’s Foreign Exchange Market Intervention

Foreign exchange market intervention must be distinguished from policy rate adjustments. In Japan, authority over foreign exchange policy rests with the Ministry of Finance, while the Bank of Japan executes market transactions under the ministry’s direction. By contrast, the Bank of Japan determines monetary policy, including the policy rate and government bond purchases.

Therefore, the claim that intervention to stop yen depreciation occurred in 2026 for the first time in 28 years is invalid. The first yen-buying intervention since 1998 took place in 2022, and additional intervention was also confirmed in 2024. To determine whether a specific transaction in 2026 was official intervention, the monthly and quarterly intervention records published by Japan’s Ministry of Finance must be checked.

Criteria for Determining Whether Intervention Succeeded

The fact that the exchange rate fell immediately after intervention is not enough to conclude that it succeeded. At a minimum, the following items must be assessed separately.

1. Did excessive volatility decline immediately after the intervention?
2. Did the effect last for months rather than days?
3. Did the expected interest rate gap between the United States and Japan move in the same direction?
4. Did market participants believe that the government might intervene repeatedly?
5. Was the scale of intervention sufficient relative to market trading volume and foreign exchange reserves?

Coordinated intervention can be more powerful than unilateral intervention because several countries send the same signal. However, if the monetary policy direction of major countries remains unchanged, there is no guarantee that it will alter the long-term trend.

Domestic and International Spillover Effects of a Super-Weak Yen

Japanese Households and Companies

A weak yen raises the yen-denominated prices of crude oil, gas, food, and raw materials. If wage growth fails to keep pace with inflation, households’ real purchasing power declines. On the other hand, companies with a high share of overseas sales may report higher earnings when foreign-currency profits are converted into yen, while spending by foreign visitors to Japan gains price competitiveness.

A weak yen therefore does not produce the same gains and losses across Japan. The beneficiaries and those bearing the burden differ depending on import dependence, the share of overseas production, currency hedging, and household income structures.

Relationship With U.S. Treasury Yields

Caution is needed regarding the simple causal claim that a weak yen automatically raises long-term U.S. interest rates. If Japanese interest rates rise, Japanese investors may have less incentive to hold U.S. Treasuries while bearing currency-hedging costs, and the return of funds to Japan could put upward pressure on U.S. Treasury yields.

In practice, however, U.S. Treasury yields are jointly determined by the Federal Reserve’s policy outlook, U.S. inflation and growth, the fiscal deficit, Treasury issuance, and global demand for safe assets. The movement of Japanese funds is one of several factors, not the sole cause.

Emerging Markets

A strong dollar can increase principal and interest burdens for countries with large dollar-denominated debts and insufficient foreign exchange reserves. If the yen is also weak, exporters competing with Japanese companies may face price pressure.

However, not all emerging-market countries necessarily sell U.S. Treasuries to defend their exchange rates. Various tools are used, including policy rate adjustments, foreign exchange swaps, bank liquidity regulations, capital flow management, and verbal intervention. Whether U.S. Treasuries were actually sold must be verified through country-specific data on foreign exchange reserves and asset holdings.

The Bank of Japan’s Dilemma and the Yen Carry Trade

Explaining the Bank of Japan’s difficulty in raising rates quickly solely in terms of fear rooted in the past is incomplete. Policy decisions take into account the persistence of inflation, wage growth, consumption and investment, government bond market functioning, and the interest burden on the government and private sector.

Trade-Offs Created by Raising Interest Rates

It is true that past cases in which Japan’s economy deteriorated after rate increases have influenced policy caution. However, Japan’s prolonged deflation cannot be explained by a single rate increase. The collapse of asset prices, financial institution distress, demographic structure, low expected inflation, and shocks to the global economy all played a role.

What the 2024 Yen Carry Unwind Revealed

The yen carry trade is a strategy of borrowing yen at low interest rates and then investing in dollar bonds, stocks, or other higher-yielding assets. Losses on this trade can increase when Japanese interest rates rise, U.S. rate cuts are expected, or the yen suddenly strengthens.

On July 31, 2024, the Bank of Japan raised its short-term policy rate target to approximately 0.25%. As concerns about a U.S. economic slowdown, a correction in technology stocks, and the unwinding of crowded positions converged, the Nikkei 225 fell by more than 12% on August 5. It is inaccurate to conclude that this was caused solely by Japan’s rate increase or to say that the Bank of Japan reversed its policy within two days. A Bank of Japan official signaled that the bank would not rush additional increases in an unstable market, but it did not cancel the July rate increase itself.

The Structure Determining the Won-Dollar Exchange Rate

A rise in the won-dollar exchange rate means that more won is needed to buy one dollar, indicating won weakness. An inverted South Korea-U.S. policy rate differential can increase the relative attractiveness of dollar assets, but actual capital flows reflect currency-hedging costs, the equity market outlook, and credit risk.

Indicators to Check Beyond the Interest Rate Differential

• The dollar index and real U.S. Treasury yields
• South Korea’s goods balance and current account balance
• Semiconductor exports and terms of trade
• Net purchases of domestic stocks and bonds by foreign investors
• Overseas securities investment by domestic institutions and individuals
• Energy import prices and international oil prices
• China’s economy and movements in the yuan
• Geopolitical risks and global volatility indices
• Expectations for the future rate paths of the South Korean and U.S. central banks

The Bank of Korea does not have to match U.S. interest rates exactly solely for the sake of the exchange rate. Monetary policy comprehensively considers price stability, financial stability, and growth conditions. Raising rates may support the won, but it can increase the interest burden on household debt and deepen the slowdown in domestic demand. Conversely, lowering rates may help the economy and financing costs, but all else being equal, it can increase pressure for won depreciation.

A Strong Won Is Not Always Beneficial

A stronger won reduces the cost of imported raw materials and overseas travel, as well as the won-converted burden of foreign-currency debt. On the other hand, it may reduce the won value of exporters’ foreign-currency revenue. Actual export competitiveness is more closely reflected by the real effective exchange rate, which compares the won with competitor currencies such as the yen, yuan, and euro, than by the won-dollar exchange rate alone.

Relative Exchange Rates and Policy Mixes Matter More Than Numbers

Looking only at the exchange rate level can cause important information to be missed. If the won and yen strengthen against the dollar at the same time, changes in South Korean companies’ price competitiveness against Japan may be limited. Conversely, if only the won strengthens while the yen remains weak, the burden may increase for industries competing with Japanese companies.

Foreign exchange market analysis should compare the following three factors together.

1. Movements of the domestic currency against the dollar
2. Cross-rates against the currencies of major competitors
3. The real effective exchange rate, which reflects inflation differentials

This relative-price perspective captures an aspect that a simple dollar exchange rate forecast can easily miss. The effect of exchange rates on exports also varies by company depending on the share of overseas production, the cost of imported intermediate goods, settlement currencies, and currency hedging.

A Practical Verification Method for Identifying Foreign Exchange Market Intervention

Not every sudden exchange rate movement is government intervention. To distinguish market rumors from official intervention, check in the following order.

1. Check whether the fiscal authorities have answered questions about whether intervention occurred.
2. When the official monthly intervention total is released, compare it to determine whether a transaction took place.
3. When quarterly daily data is released, check the transaction date and amount.
4. Review inflation, employment, and central bank remarks released at the same time.
5. Examine whether options volatility, interest rates, and stock prices moved simultaneously, not just the spot exchange rate.

The government may decline to confirm intervention immediately after a transaction to preserve its effectiveness. Therefore, reports that determine the scale and parties involved based only on sharp intraday movements should be treated as provisional information.

Principles for Investing in Exchange Rates, Dollars, and Yen

It is difficult to consistently identify exchange rate peaks and troughs. However, that does not mean a particular currency will rise forever or that dollar dominance is permanently guaranteed. The dollar maintains a central position in international foreign exchange reserves, trade settlement, and financial markets, but its share and manner of use may change depending on policies, sanctions, and market infrastructure.

Individual investors are better off defining their objectives before forming a forecast.

• Money with a fixed spending date, such as tuition abroad or travel expenses, should be exchanged in installments on multiple dates.
• For overseas stock investments, calculate equity risk and exchange rate risk separately.
• If most income and spending are in won, approach foreign-currency assets as a means of diversification.
• Leveraged foreign exchange products and unhedged debt-financed investments can generate large losses from even small exchange rate movements.
• Set target allocations and rebalance when exchange rate changes cause allocations to deviate substantially.
• When comparing interest income, include taxes, fees, foreign exchange spreads, and hedging costs.

Buying in installments only diversifies timing risk; it does not prevent losses. If investors continue buying a currency that declines over a long period, the average purchase price may fall while the total loss increases.

Five Pillars for Reading the Future Macroeconomy

1. Geopolitics and Energy Prices

Conflict in the Middle East and instability along major maritime shipping routes can raise oil, gas, and freight prices. This can worsen inflation and trade balances in importing countries and delay central bank rate cuts. However, the actual impact depends on the scale and duration of supply disruptions.

2. K-Shaped Gaps in Assets and Income

Technological change and rising asset prices can provide greater benefits to groups with capital, skills, and market power. However, polarization is not an inevitable law of nature. Taxation, education, competition policy, and labor market institutions can change distributional outcomes.

3. Federal Reserve Independence and Policy Credibility

Changes in Federal Reserve leadership are important, but a particular candidate or policy direction should not be treated as settled before the official process. Markets evaluate the price stability objective, congressional oversight, the composition of the policy committee, and whether central bank independence is maintained, rather than the individual alone.

4. AI Investment and Productivity

Investment in AI data centers and semiconductors can increase demand for electricity, equipment, and capital goods. It may raise productivity over the long term, but the speed at which it translates into corporate earnings and economy-wide productivity is uncertain. Overinvestment and power constraints must also be examined.

5. The Dollar’s International Role

The dollar’s status derives from the scale and liquidity of U.S. financial markets, legal credibility, the Treasury market, payment networks, and the limitations of alternative currencies. The possibility of a gradual decline in the dollar’s share and the resurgence of dollar demand during crises can occur simultaneously. Therefore, both extremes—an immediate collapse of dollar dominance and its permanent immutability—should be treated with caution.

How to Read Exchange Rate Forecasts Through Scenarios

Exchange rate forecasts are more accurate when expressed as conditional scenarios rather than a single target value. This also makes it possible to identify which assumption was wrong when a forecast misses the mark.