Why the Aussie dollar is climbing back towards a 36-year high against the yen

The Australian dollar is on the rise again against the Japanese yen, nearing its highest level in over three and a half decades. This is beneficial for Australians planning holidays in Japan as their dollars will stretch further. However, the weakening yen has raised concerns for the United States and Japanese governments.

In late July, both nations took unprecedented action to support the yen, which had reached its lowest level against the US dollar since 1986. The Bank of Japan and US Treasury jointly purchased tens of billions of dollars' worth of yen to prop it up. While this initial intervention was successful, the yen recovered to a three-month high last week before gradually declining once more.

The weak yen benefits Japan's high-tech manufacturing exports, which are a major component of its economy. However, a weaker currency also increases the cost of imports, such as oil, gas, and food, potentially impacting living expenses. For the US, a stronger yen makes Japanese exports more competitive, which could undermine President Trump's efforts to boost American manufacturing through tariffs.

The US government's concerns about the yen's strength are linked to the fact that Japan holds over $1.14 trillion in US Treasury debt, making it the largest single creditor. If the Bank of Japan needs to raise funds to intervene, it might sell US bonds, which could lead to higher interest rates for the United States. Additionally, a weaker yen could pose risks for the US, as many banks have been borrowing yen to invest in higher-yielding currencies, a practice known as the carry trade.

If this trade were to unwind, it could cause significant volatility in global financial markets, as seen in 2024 when Japan raised interest rates.