The Japanese yen slid to ¥162 per dollar on Tuesday, marking its weakest level since December 1986 as investors fret over the Iran war's economic fallout. The currency's more than 3% decline this year has intensified speculation about government intervention to prop up the yen, which faces pressure from multiple fronts including energy price shocks and monetary policy divergence.

Japan's chief cabinet secretary Minoru Kihara reiterated the government's readiness to act, though analysts question intervention effectiveness. The Bank of Japan recently raised rates to around 1%—the highest since 1995—but trails the Federal Reserve's expected moves toward 3.5-3.75%. Meanwhile, Prime Minister Sanae Takaichi has proposed a $2.3tn investment program over 14 years, raising concerns about fiscal expansion without corresponding monetary tightening.

Foreign investors chasing AI and semiconductor stocks have driven the Nikkei 225 above 72,000 points, but currency hedging by these buyers has added downward pressure on the yen. Analysts note the central bank risks 'falling behind the curve' on inflation, which climbed to 1.5% in May.

ING's Chris Turner expects continued intervention despite doubts about effectiveness, warning that unchecked yen losses could trigger broader market pressure on Japanese bonds and equities. The Bank of Japan's policy disconnect from US and European peers suggests further yen weakness ahead.