The Japanese yen has experienced a dramatic decline, plummeting to a historic low of $0.0062 against the US dollar as of June 28, a value not seen since 1986. This drastic fall is attributed to a combination of factors, including a significant policy shift by the Bank of Japan (BOJ) in March and substantial interest rate differentials.

The BOJ's decision to discontinue its negative interest rate policy and yield curve control marked a turning point for the yen, causing it to lose value rapidly. These measures had previously propped up the currency, maintaining its artificial stability. The shift in policy has had far-reaching consequences, sending the yen into a downward spiral.

The interest rate disparity between Japan and other countries, particularly the United States, has exacerbated the yen's decline. With Japan's interest rates significantly lower than those in the US, investors have been inclined to favor the dollar, further weakening the yen. This trend has resulted in the yen becoming the worst-performing major currency against the US dollar in 2024, with a staggering 6% drop in value.

Despite the Bank of Japan's recent interest rate hike, the first in 17 years, the yen remains under pressure. The rate hike, though a historic move, was not enough to stem the currency's decline, as Japan's interest rates continue to lag behind those in the developed world. The country's new policy rate, ranging between 0% and 0.1%, pales in comparison to the US's benchmark federal funds rate of 5.25% to 5.5%.

The weak yen has both positive and negative effects on Japan's economy. On the one hand, it benefits large Japanese companies with global operations, increasing the value of their repatriated overseas profits. A weaker yen also boosts tourism, as incoming travelers enjoy greater purchasing power. However, the soft yen makes imports of essential goods like energy and food more expensive, negatively impacting consumers.

The future of the yen remains uncertain, with its trajectory closely tied to the interest rate gap between Japan and other nations. If this gap persists, the yen is likely to remain weak. However, if the US Federal Reserve follows through on its plan to cut rates three times in 2024, the rate gap may shrink, providing support for the yen.

Japanese policymakers are keeping a close eye on the situation, prepared to intervene if necessary. While the government has not taken direct action in the market since 2022, Finance Minister Shunichi Suzuki has issued verbal warnings to stabilize the yen. The last intervention occurred in 2022, when the authorities supported the local currency through multiple market interventions.

In conclusion, the Japanese yen's unprecedented slump is a complex issue, influenced by a combination of monetary policy changes and interest rate differentials. As the situation continues to evolve, it remains to be seen how the yen will respond to these factors and what measures Japanese policymakers will take to address the currency's decline.