The real effective exchange rate index, which reflects the comprehensive strength of the Japanese yen, has fallen to its lowest level in 53 years due to Japan's prolonged economic stagnation, indicating a continued decline in the yen's purchasing power. According to the latest data from the Bank for International Settlements, the index dropped to 67.73 in January, the lowest since Japan adopted a floating exchange rate system in 1973.
Experts point out that the persistent weakening of the yen's purchasing power stems from deep-seated structural issues in Japan's economy and the challenges of adapting macroeconomic policies. Insufficient economic growth momentum is a core factor, as long-term economic sluggishness has hampered improvements in domestic productivity and stalled industrial upgrades, preventing sustained economic expansion from supporting the currency's real value.
The real effective exchange rate index is a key measure of a currency's actual purchasing power. A continuous decline in this index signals a systematic reduction in the overall purchasing power of the yen.
To stimulate the economy, Japan has maintained extremely low interest rates for an extended period. While this policy aims to boost growth by reducing corporate financing costs and encouraging consumption and investment in the short term, the long-term low-interest environment has significantly compressed the returns on holding yen. This has led to diminishing international capital interest in the yen, increasing selling pressure on the currency in foreign exchange markets and further depressing its real value.
A survey referenced in early 2026 indicated that 3,593 food items in Japan are set to see price increases of around 14% on average between January and April of that year, including frozen foods, rice products, and instant noodles. From May onward, approximately 1,000 food items are expected to see price hikes each month, totaling about 15,000 items for the year.
Meanwhile, data released on February 9 showed that Japan's average real wages per capita decreased by 1.3% in 2025 after adjusting for inflation, marking the fourth consecutive year of decline. Although nominal wages grew by 2.3%, reaching an average of 355,900 yen per month, consumer price increases of 3.7% outpaced wage growth, leading to a continued drop in real income.
The relocation of Japanese manufacturing overseas has also contributed to a decline in export competitiveness and a normalization of trade deficits. Traditional strengths in industries such as automobiles and electronics face intense competition from China and South Korea, while emerging sectors like digital economy and platform businesses lag in development. This has narrowed Japan's current account surplus, weakening fundamental support for the yen.
Japan's real GDP contracted by 1.8% in the third quarter of 2025, the first decline in six quarters. External demand shrank for seven consecutive months due to the impact of U.S. tariff policies, while domestic personal consumption saw only a marginal increase of 0.1%. With consumption accounting for more than half of the economy, the lack of robust consumer spending has further undermined growth. Additionally, a deteriorating demographic structure, with Japan's total population declining for the 16th consecutive year and the elderly population exceeding 30%, has exacerbated labor shortages, raised corporate costs, and contributed to a shrinking consumer market.
The yen's real effective exchange rate hitting a 53-year low is not merely a numerical fluctuation in currency markets but a reflection of deep-rooted structural weaknesses in Japan's economy. The nation, once regarded as an economic standout, now faces a triple crisis of monetary credibility, industrial competitiveness, and institutional vitality.
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