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The Japanese yen falls to a fresh four-decade low against the US dollar.
Currency weakness reignites speculation about government intervention.
Our International Equity team favour Japanese exporters and banks as potential beneficiaries.
After weeks of steady decline, the Japanese yen hit a four-decade low against the US dollar on 30 June1, as shifting US Federal Reserve (the Fed) interest rate expectations strengthened the greenback and put pressure on other major currencies.
The currency’s weakness has reignited speculation about further intervention by the Japanese government, which spent a record ¥11.7tn (US$74bn) in April and May to support the yen2. It also highlights how foreign exchange markets have become clear reflections of changing interest rate expectations.
By Thursday (2 July), however, sentiment had improved with the yen strengthening against the dollar amid the release of weaker-than-expected US labour market data. Nonfarm payrolls for June increase by 57,0003, well below forecasts, prompting investors to reassess the likelihood of additional US interest rate hikes.
Against this backdrop, attention remains on the policy paths of the Bank of Japan (BoJ) and the Fed. In June, the BoJ raised its benchmark interest rate to 1%, its highest level in 31 years, while signalling the potential for further rate increases this year. The bank will next meet at the end of July.
While the move has modestly narrowed the gap between Japanese and US interest rates, investors have pointed to new Fed Chairman Kevin Warsh’s emphasis on price stability as a signal that US rates could remain higher for longer.
“One of the major risks posed by a weak yen is higher inflation and the further erosion of household purchasing power which has affected Prime Minister Sanae Takaichi’s policy flexibility,” says Martin Schulz, Head of International Equity Group at Federated Hermes.
“There are also political risks associated with a weak yen, as the bank wrestles with balancing the domestic demand environment while preventing the yen from spiralling out of control all while trying to maintain political independence,” Schulz adds.
How are we positioned?
“On the one hand, we believe that owning technology and industrial exporters is the best way to position for Yen weakness. On the other, we believe that the Japanese banks – although primarily domestic exposed only – remain a macro call on the bank’s interest rate hike cycle and the ability for the banks to generate larger net interest margins and higher net interest income,” Schulz explains.
Historically, Japanese auto manufacturers have been an effective hedge against yen weakness. However, Schulz believes opportunities now extend beyond the automotives sector.
“Given the insatiable demand from US cloud service providers seeking leadership in artificial intelligence (AI), we have identified a handful of high-quality, well-run exporters with significant exposure to both direct US semiconductor demand and the broader AI infrastructure buildout,” he says.
“The opportunity to own high-quality compounders benefitting from a long duration global growth theme which can function as an effective hedge against persistent yen weakness is why these names remain among our largest positions,” he adds.
Against this backdrop, Japan’s Nikkei 225 has logged its best quarter on record supported by a rebound in technology stocks and continued optimism around AI-related demand. However, the index slipped on Thursday (2 July), down 2.5%4, as investors assessed whether earnings growth and monetary policy developments will be sufficient to sustain the market’s recent momentum.
1 LSEG data, as at 30 June 2026.
2 Japanese Ministry of Finance
3 CNBC, as at 2 July 2026.
4 Trading Economics, as at 2 July 2026.
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