The sharp decline of the Japanese yen is being felt directly in household budgets. A resident in Fukuoka, Japan, shared her shopping bill, noting the price for four packs of diapers has surged from 6,174 yen in April to 6,946 yen this month.
On June 3, the yen briefly fell to 160 against the US dollar in the Tokyo foreign exchange market. By 7:00 PM Beijing time, it had recovered slightly to around 159.8 yen per dollar.
Data from the Bank for International Settlements shows that as of April this year, Japan's real effective exchange rate index, calculated with 2020 as the baseline, had dropped to 65.70. This is the lowest level since Japan adopted a floating exchange rate system in 1973. The real effective exchange rate factors in inflation, trade conditions, and the relative performance of a basket of currencies, providing a true reflection of a currency's external purchasing power.
The Pain of a Weaker Yen
The tangible impact of the yen's depreciation extends beyond grocery bills, manifesting in the rising operational costs for Japanese businesses. From a national fiscal perspective, analysis suggests the imported inflation pressure from a weak yen could push up Japanese government bond yields, increasing the country's fiscal burden.
Facing mounting pressure, Japanese authorities have intervened in the market multiple times over the past year to defend the currency. On May 29, Japan's Ministry of Finance confirmed that between April 28 and May 27, authorities used approximately 11.73 trillion yen, equivalent to about $736 billion, to buy yen and support the exchange rate. This marks the largest currency intervention in Japan's history. Despite these repeated government actions, speculators have continued to bet against the yen.
Causes of the Persistent Decline
The yen's depreciation pressure has intensified recently, repeatedly testing the 160 yen per dollar level, widely seen by the market as a trigger line for Japanese government intervention. Analysis points to multiple contributing factors. Externally, expectations of a more hawkish US Federal Reserve, coupled with a slower pace of interest rate hikes by the Bank of Japan, have significantly widened the US-Japan interest rate differential. A strong US dollar index has added further downward pressure on the yen. Internally, imported inflation is negatively impacting Japan's domestic economy, and market concerns over the government's fiscal deficit continue to weaken confidence in the yen.
The yen's weakness has drawn significant market attention. A researcher recently noted on social media that the yen has become weaker than the Turkish lira, making it the "world's weakest currency." This assessment is based on real effective exchange rates, where the yen fell below the Turkish lira in April.
Experts note that while ranking currencies by real exchange rates can be debated, the yen has indeed depreciated to rare levels. Japan is not a resource-rich country, so a weaker yen is not an abstract exchange rate issue but directly pushes up the cost of living, including electricity, gasoline, bread, and meat. Beyond pressure on household budgets, cross-border consumption patterns are shifting: foreign visitors find Japan cheaper, while Japanese students and shoppers abroad face significantly higher costs, representing an effective downgrade in the currency's purchasing power.
Residents report feeling the burden of higher utility and import goods prices. While individual item price increases of a few dozen yen might seem small, the cumulative effect on monthly food bills has become substantial.
Broader Economic Impact
Beyond eroding household purchasing power, small and medium-sized enterprises in Japan are facing a difficult situation. A weaker yen means soaring import costs for raw materials, squeezing profit margins and dramatically increasing operational pressure. While currency depreciation theoretically boosts export competitiveness, the effect is now less pronounced as Japan has shifted a significant portion of its production base overseas.
From a macro perspective, a plunging yen imposes a heavier burden on Japan's public finances. The more the yen depreciates, the more the Japanese government needs to expand fiscal spending, leading to a heavier government debt burden. In the long run, this could prompt further government bond issuance, exacerbating international financial market concerns about the yen and Japanese government bonds, potentially triggering further yen depreciation and creating a vicious cycle.
Market Intervention's Limited Effect
In the face of persistent yen weakness, market intervention is a common tool for the Japanese government. The latest data from Japan's Ministry of Finance shows intervention totaling 11.73 trillion yen between April 28 and May 27. Authorities conducted operations on April 30 and during the Golden Week holiday in May.
However, the market widely believes that intervention alone addresses symptoms rather than the root cause and cannot fundamentally reverse the yen's downtrend. Moreover, short positions against the yen continue to increase. Data shows leveraged funds and asset management companies have collectively increased their bearish bets on the yen to the highest level since July 2024.
Analysts explain that shorting the yen is essentially a bet that some of Japan's structural economic contradictions cannot be resolved in the short term. The fundamental weakness stems from the hollowing out of its real economy, large-scale industrial relocation overseas, and overseas income remaining abroad without being converted into yen. Factors like an aging population, a shrinking domestic market, and innovation stagnation also lead to a lack of high-return investment opportunities domestically, causing capital outflows and yen depreciation.
Other experts attribute the market's bearish stance primarily to the current US-Japan interest rate differential. With US rates significantly higher than Japan's, alongside Japan's fiscal expansion, high energy import costs, and a slow pace of central bank rate hikes, investors see selling yen as a profitable trade.
They further note that while Japan's Ministry of Finance recently intervened, the exchange rate quickly returned to around 160 yen per dollar, indicating intervention can only alter the pace of depreciation, not the trend. The government's intent is more to disrupt market momentum than to defend a specific fixed rate. Without a clear path for interest rate hikes and fiscal discipline, intervention merely buys time for policymakers.
Long-term Challenges and Outlook
Market concerns are growing that sustained yen depreciation and the spread of imported inflation will more broadly undermine Japan's macroeconomic foundation. Small and medium-sized enterprises, which account for 99.7% of all Japanese companies, are particularly vulnerable. These firms lack the hedging capabilities and pricing power of multinational corporations, making it difficult to pass on rising raw material and energy costs downstream, forcing them to absorb the squeeze on profits. If real wages for employees in these companies, which form the backbone of employment, consistently lag behind inflation, private consumption will continue to shrink, threatening to stall Japan's domestic demand engine and disrupt a virtuous economic cycle.
Analysis also suggests that persistent yen weakness could lead to sustained capital outflows, further weakening international confidence in yen-denominated assets and limiting the Bank of Japan's policy flexibility. This could trap Japan in a passive cycle where it hesitates to raise rates, the yen continues to fall, and imported inflation worsens, posing long-term challenges to economic stability.
Conditions for Stabilization
For the yen to stabilize, experts point to several necessary conditions. If geopolitical tensions ease and oil prices fall, expectations for US rate hikes might cool, potentially alleviating pressure on the yen. Simultaneously, the Japanese government needs policies to stimulate domestic demand and industrial growth. Effectively promoting economic growth could enhance market confidence in the yen.
Stopping the yen's decline in the short term relies on interest rate policy and market intervention, but the long-term solution requires making the Japanese economy itself an attractive investment destination. The key lies in addressing domestic structural economic issues and creating an environment where businesses and capital can achieve high returns. However, reforms to tackle these structural problems face significant political and social resistance and may be difficult to implement in the current environment.
Experts generally agree that the US-Japan interest rate differential and Japan's fiscal pressures will continue to weigh on the yen. The outlook depends on several factors. If the Bank of Japan raises rates in June and outlines a path for monetary policy normalization, coupled with falling oil prices and a weaker US dollar, the yen could potentially recover to the 150-155 range against the dollar within the year. Conversely, if US rates remain high, oil prices surge further, and Japan expands fiscal stimulus, the yen will likely continue its downward trajectory.
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