Japanese yen at 40-year low: Why care even if you don't own investments?

Dubai: Japan's currency has dropped to its weakest level against the US dollar since 1986, putting global investors on alert and raising fresh concerns about whether Tokyo will step in to support the yen.

At first glance, the decline may appear to have little relevance for people living in the UAE. Yet the effects could extend well beyond Japan, influencing US interest rates, global investment markets and borrowing costs that directly affect the Emirates because the dirham is pegged to the US dollar.

Here's what is happening, why markets are paying close attention, and what it could mean for UAE residents.

Why is the yen falling?

The main reason is the growing gap between interest rates in the United States and Japan. The US Federal Reserve has kept interest rates relatively high in its effort to control inflation.

Although the Bank of Japan has begun raising rates after years of ultra-loose monetary policy, Japanese borrowing costs remain far lower than those in the US. That makes dollar-denominated assets much more attractive to investors, encouraging them to sell yen and buy dollars.

Daniela Hathorn, Senior Market Analyst at Capital.com, said the widening policy gap continues to dominate currency markets. "USD/JPY has extended its rally above the 162 level, reaching fresh multi-decade highs as the divergence between US and Japanese monetary policy continues to dominate the outlook."

She added: "A stronger US dollar, supported by expectations that the Federal Reserve will keep rates higher for longer, has outweighed the Bank of Japan's recent rate hike."

USD/JPY at 162: Explained

The USD/JPY exchange rate shows how many Japanese yen are needed to buy one US dollar. At around 162:

• One US dollar buys roughly 162 yen.

• The higher the number, the weaker the yen becomes.

• It is the weakest level for Japan's currency in almost four decades.

For Japanese consumers and businesses, this makes imports more expensive because they must pay more yen to buy goods priced in dollars, including oil and other commodities.

Can't Japan stabilise currency?

Japan can intervene in foreign exchange markets by buying yen. To do that, authorities must first sell some of their foreign currency reserves, most of which are invested in US dollar assets.

Markets are increasingly watching for such intervention. Hathorn said: "The latest move has also revived speculation over official intervention, with Japanese authorities reiterating they stand ready to respond to excessive currency moves."

She also warned that intervention alone rarely changes long-term trends. "While renewed intervention threats may increase short-term volatility, history suggests any impact is likely to be temporary unless accompanied by a more meaningful shift in policy or yield differentials."

Why are investors worried?

This is where the story becomes much bigger than Japan. Japan owns more than $1 trillion worth of US Treasury bonds, making it one of the largest foreign lenders to the United States.

If Japanese authorities repeatedly intervene to support the yen, they may need to sell part of those holdings to raise dollars. Nigel Green, CEO of deVere Group, believes investors are focusing on the wrong issue.

"Everyone's focused on whether Tokyo will intervene in the currency market as the yen hits its lowest level in four decades. The more important question is how Japan pays for that intervention."

He added: "If authorities are compelled to step up support for the yen over a prolonged period, global investors could suddenly find themselves confronting an entirely different risk: one of the world's largest foreign holders of US Treasuries becoming a more significant seller."

If Japan sells significant amounts of US government debt:

• Treasury prices could fall.

• Treasury yields could rise.

• Global borrowing costs could increase.

• Financial markets around the world could become more volatile.

Why can't intervention solve this?

Many economists say intervention only treats the symptoms, not the underlying cause. As long as US interest rates remain much higher than Japan's, investors can continue borrowing cheaply in yen and investing in higher-yielding assets elsewhere.

That incentive keeps pressure on Japan's currency. Green said: "The uncomfortable reality for policymakers is that intervention can slow a market move, but, as history teaches us, it rarely changes the underlying economic fundamentals."

He continued: "As long as investors can borrow cheaply in yen and earn substantially higher returns elsewhere, the structural pressure on the currency remains in place."

How does this affect you?

The impact is mostly indirect, but it can still be meaningful.

1. Interest rates

The UAE dirham is pegged to the US dollar. If strong US economic data convinces the Federal Reserve to keep interest rates higher for longer, UAE borrowing costs are also likely to remain elevated because the Central Bank of the UAE typically mirrors Fed policy.

2. Mortgages and loans

Higher interest rates generally mean more expensive mortgages, car loans and business financing for borrowers in the UAE.

3. Investments

Many UAE residents invest through global mutual funds, exchange-traded funds and retirement portfolios that hold US government bonds and international equities. Sharp moves in Treasury yields can affect the performance of those investments.

4. Oil prices

The recent ceasefire between the US and Iran has helped keep oil prices relatively stable, allowing markets to focus once again on economic data rather than geopolitical risks.

Investor relief on ceasefire

Hathorn said the ceasefire has helped support investor sentiment. "The ceasefire between the US and Iran continues to underpin sentiment, helping keep oil prices near recent lows and allowing equities to stabilise after last week's volatility."

She added that investors are now shifting their attention back to economic fundamentals. "Attention is increasingly shifting back toward the economic calendar. Thursday's US non-farm payrolls report is the week's key event, with markets looking for confirmation that the labour market remains resilient."

A stronger-than-expected jobs report could reinforce expectations that the Federal Reserve will keep interest rates elevated, while weaker data could prompt investors to reassess the outlook.

What to watch next?

Investors are monitoring two key developments. The first is whether Japanese authorities intervene to slow the yen's decline.

The second is US economic data, especially employment and inflation figures, which will shape expectations for future Federal Reserve policy.

Together, these developments will influence global bond yields, currency markets and investor sentiment over the coming weeks.

The bottom line?

The falling yen is no longer viewed simply as a Japanese currency story.

If Japan is forced into repeated intervention, it may need to sell increasing amounts of US Treasury bonds to finance those operations. That could push global borrowing costs higher and ripple across financial markets.

Green summed up the concern by saying: "The market is asking whether Japan will intervene." He added: "The question investors should be asking instead is: if Japan is, indeed, forced to intervene repeatedly, what assets will it have to sell to defend its currency?"

His conclusion highlights why investors worldwide are paying close attention. "If the answer increasingly includes US Treasuries, then what appears to be a Japanese currency crisis today would rapidly become a global bond market crisis tomorrow."

For UAE residents, the key takeaway is not the exchange rate itself, but what it could signal for US interest rates, mortgage costs, investment returns and the broader global economy that increasingly shapes financial conditions in the Emirates.