By Junko Fukutome and Jason Douglas

TOKYO — If New Yorker John Caramichael is going to splurge a little, he would rather do it in Japan.

With the Japanese yen on Tuesday touching a 40-year low against the dollar, the 120,000 yen he spent on a new Seiko watch works out to about $740, a steal compared with the $1,000 or so he would expect to pay back home.

"We actually don't shop that much in New York anymore," said Caramichael as he strolled among the department stores and boutiques of Tokyo's glitzy Ginza district.

"We know that we're coming here, so we'll save up dollars and then basically make major purchases here," said Caramichael, who has been making regular trips to the country with his Japanese wife since 2019.

A dollar on Tuesday bought a little more than 162 yen, the weakest level for the Japanese currency since 1986.

The yen is down around 3.5% against the dollar this year, according to data from broker Tullett Prebon, and has sunk more than 11% in the past three years.

The latest slide has put foreign-exchange traders on high alert for a fresh round of yen buying by the Japanese authorities to shore up the currency. Tokyo has already burned through more than $70 billion of foreign-exchange reserves to prop up the yen so far this year.

Japan's finance minister Satsuki Katayama fired another warning shot toward investors at a news conference Tuesday, saying the finance ministry and central bank "will take appropriate action on currencies at any time as needed."

She said that in discussions with Scott Bessent, the U.S. Treasury secretary, they had agreed that "decisive steps" could be taken to arrest the yen's slide.

Driving the currency's decline is a mix of pressures including anxiety over the fiscal plans of Prime Minister Sanae Takaichi and concern that the Bank of Japan is moving too slowly to raise interest rates.

The yen, in common with other currencies, is also under pressure from a surging dollar, which has gotten a lift this year from war in Iran and hawkish signals on interest rates from new Federal Reserve Chairman Kevin Warsh.

"It's not just a yen story," said Norihiro Yamaguchi, lead Japan economist in Tokyo at Oxford Economics, a consulting firm. An index that measures the dollar against a basket of major currencies is up 2.5% this year.

Takaichi, who scored a landslide election victory in February, generally favors a weak yen, since it boosts exports and the corporate profits Japanese multinationals earn overseas.

But the yen's slide is also pushing up inflation and straining household budgets in a country that only recently emerged from 30 years of flat or falling prices.

"As for daily necessities, I do notice the impact," said Osamu Hachira, a Tokyo native. Hachira said that these days, the weak yen means he and his family prefer to take holidays in Japan than travel overseas. "We can't go abroad and splurge like we used to," he said.

For Rachael Erwin, Olivia Erwin and Keoni Gavino, American tourists visiting Tokyo after attending a wedding in Beijing, the favorable exchange rate means fashion items such as Onitsuka Tiger sneakers can be had for much less than they would cost at home.

"We were going to come regardless, but it just makes it that much better that we can make our money go farther," said Rachael.

At 162 yen to the dollar, the currency has already drifted past the 160 level that triggered a run of intervention in April and May. That has heightened expectations for another bout of yen buying soon.

The Japanese authorities aren't necessarily trying to drive the yen higher, said Brad Setser, senior fellow at the Council on Foreign Relations in New York and a former U.S. Treasury official. Instead, they are effectively setting a floor for the currency to stop the cost of imports — above all energy — from rising too fast.

"As long as the market is afraid of the Ministry of Finance at these levels, then I see the MoF as succeeding," Setser said.

Yuji Noguchi, who owns a business in Ginza, said the weak yen has its advantages. He invests his savings in U.S. stocks, and the dizzying gains of the artificial-intelligence-driven run-up in stocks mean his returns have been magnified when converted back into yen. "The weak yen does make it incredibly profitable," he said.

Still, he too worries about inflation and eroding living standards. He said Japan's famous ski resorts are becoming increasingly unaffordable, which he blamed on an influx of tourists.

"I'm lucky, I guess. But sometimes I wonder if I'm really that lucky," he said.

Write to Junko Fukutome at junko.fukutome@wsj.com and Jason Douglas at jason.douglas@wsj.com