Japanese yen tests critical lows near 160 as investor confidence wanes

The yen is falling again, fast. It’s now testing the 160-per-dollar level, and people in the market are on edge. No one’s really surprised, but the speed of the drop is turning heads.

What used to feel like a slow decline is now looking like a full-blown slide. The last time the yen was even close to this weak, most of today’s traders weren’t even in the game.

The trouble started last October when Sanae Takaichi became Japan’s first female prime minister. Takaichi is known for favoring big government spending. That scared off a lot of investors.

Then she called a snap election, hoping to grab more seats in parliament and lock in her policies. The vote is set for February 8. If she wins, she’s expected to spend even more to boost Japan’s economy.

Traders are pulling out as short positions increase

A lot of traders spent 2025 betting the yen would rebound. Now, most of them are done waiting. They’ve flipped their bets. Net shorts are growing, and fast. “Nobody wants to fight this anymore,” one Tokyo-based trader said.

The pressure isn’t just about politics. The yen had stayed in a range of 100 to 120 per dollar for most of the 2000s. But things changed when the Ukraine war began.

Japan had to pay more for energy imports, and the Bank of Japan kept interest rates near zero while the Federal Reserve raised theirs. That combo hammered the yen.

Right now, the 160 line is what everyone’s watching. That’s where many believe Japan’s government will feel forced to step in. But so far, they’ve stayed quiet.

There’s more going on than just dollar strength. Japan’s real effective exchange rate, which compares the yen to its major trading partners and adjusts for inflation, has dropped over 30% since 2020.

At the same time, Japan’s national debt is sitting above 200% of GDP. That’s the highest in the developed world. Takaichi says she can fix it by growing the economy, not by cutting spending. Investors aren’t sold on that.

Bond yields rise but yen keeps falling anyway

Usually, when bond yields go up, the currency gets a boost. But that old pattern just broke. Japanese government bond yields have been rising, but the yen is still falling. That disconnect has people spooked.

Stock markets across Asia are feeling the pressure too. Japan’s Nikkei 225 fell 1.2% on Wednesday. Lasertec dropped 7%, Konami was down 5.8%, and Tokyo Electron fell 3.2%. The Topix index slid 0.39%.

In Australia, the S&P/ASX 200 slipped 0.22%, pulled down by tech and education stocks. South Korea’s Kospi edged up 0.4%, and the Kosdaq gained 1.01%. Hang Seng Index futures in Hong Kong stood at 26,590, slightly below the last close of 26,834.77.

If you're reading this, you’re already ahead. Stay there with our newsletter.