Yen Struggles as U.S. Yields Stay Elevated

That dynamic has real economic consequences for Japan. A weaker currency raises import costs, keeps inflation pressures alive and pushes up mortgage and corporate borrowing costs if domestic yields keep rising. It also complicates the government’s effort to reassure markets that fiscal expansion under Prime Minister Sanae Takaichi will be “responsible,” especially with investors still unconvinced about how stimulus plans will be funded.

The market reaction shows how sensitive the yen is to any hint of policy or institutional demand for Japanese assets. Speculation around the Government Pension Investment Fund’s portfolio review had supported the yen, but reports that the issue was not on the agenda at its latest meeting removed one source of support and added to selling pressure.

The backdrop is a global bond market that is being pushed higher by inflation fears, fiscal anxiety and war-risk energy prices. G7 coordinated oil releases may ease prices at the margin, but Saudi Aramco’s chief warned the supply shock is far from over, reinforcing the idea that inflation may stay sticky and long-term yields elevated.

For investors, that means the yen remains vulnerable unless U.S. yields fall decisively or the Bank of Japan signals a more aggressive tightening path. The dollar-yen pair is therefore likely to stay driven by bond-market moves, with Japan’s October policy meeting and Ueda’s remarks the next key catalysts.