US Treasury Report Declares Yen 'Severely Undervalued' as Markets Bet on Continued Depreciation

The US Treasury Department released its semiannual foreign exchange report on Thursday in Washington, warning about the continued weakness of the Japanese yen. According to Treasury data cited in the report, from the end of 2011 to the end of April 2026, the yen has depreciated by approximately 51% whether measured by the real effective exchange rate or against the US dollar, leading to the determination that "the yen is severely undervalued."

The report specifically emphasized that even as the US-Japan interest rate differential is narrowing, the yen continues to weaken, indicating that factors driving yen depreciation have exceeded the scope of pure interest rate differentials. The US Treasury explicitly stated that "monetary policy normalization will help anchor inflation expectations and reduce excessive exchange rate volatility." The report also noted that Japanese nominal wages have risen significantly, but inflation continues to erode household purchasing power, implying US support for the Bank of Japan to continue advancing its rate hike process.

Following the report's release, the yen approached the 164 level against the US dollar, falling to its lowest level in nearly four decades.

In response to the report, Japanese Finance Minister Katayama gave a positive response, noting that the report referenced the US-Japan joint statement. While not specifying particular trigger conditions or operational tools, phrases such as "at any time" and "appropriate response" were widely interpreted by the market as a warning against speculative exchange rate trading. The US Treasury also stated in the report that it "will continue to engage in close consultations with Japan's Ministry of Finance on macroeconomic and foreign exchange matters," language interpreted by the market as tacit approval of potential Japanese intervention, while preserving space for policy coordination between the two sides on exchange rate issues.

The market reacted coolly, with investors betting on further yen weakness unaffected. Tony Sycamore, an analyst at IG Australia, said: "Against the backdrop of surging energy prices, hawkish Fed expectations being repriced, and the yen's diminished safe-haven status, any remarks from Japanese officials about readiness to intervene or accelerate BOJ rate hikes are likely to be ignored by the market." He expects USD/JPY to continue rising toward 165, stating bluntly that "at this moment, trying to support the yen is like trying to stop a speeding train."

Data released on the 23rd showed that the Bank of Japan's nominal effective exchange rate index — a comprehensive measure of the yen against a basket of trade-weighted currencies — simultaneously hit a new yearly low. The continued decline of the trade-weighted yen means that costs for goods and services imported by Japan from more trading partners are rising, and the sources of imported inflation pressure are expanding from a single category of "dollar-denominated energy" to a broader range of import categories.

For the Bank of Japan, this makes its efforts to advance monetary policy normalization without undermining economic recovery even more complex. The comprehensive depreciation pattern also means that even if BOJ rate hikes narrow the US-Japan interest rate differential, the yen's weakness against non-dollar currencies such as the euro and pound may not improve in tandem — this depends on the monetary policy trajectories of major economies.

During the day, multiple Japanese macroeconomic data points were released, painting a comprehensive picture of the country's economy against the backdrop of energy shocks.

Japan's core CPI (excluding fresh food) for June rose 1.6% year-on-year, up from 1.4% in May, in line with market survey expectations, marking the first renewed uptick after two consecutive months of decline. The "core-core CPI" (excluding fresh food and energy) rose 1.7% year-on-year, and the overall CPI also rose 1.7%. The core-core CPI increase has fallen to its lowest level since August 2022, reflecting that the lagged effects of energy price volatility and earlier government subsidy policies are gradually dissipating; the stabilization and rebound of core CPI indicates that the price transmission mechanism on the demand side still maintains a degree of resilience.