Why is the Japanese Yen So Weak and What Does It Mean for the Economy?

The Japanese yen has been experiencing a prolonged period of weakness, and it's essential to understand the reasons behind this trend. The yen's value has dropped significantly against other major currencies, making imports more expensive for Japan.

One major factor contributing to the yen's weakness is Japan's large trade deficit. According to recent data, Japan's trade deficit has been increasing steadily, with a significant portion of it being financed by foreign investors.

This influx of foreign capital has led to a surge in the money supply in Japan, causing the yen to depreciate. The Bank of Japan's monetary policy has also played a role in the yen's weakness, as it has kept interest rates low to stimulate the economy.

The yen's weakness has significant implications for the Japanese economy, making imports more expensive and potentially leading to higher inflation.

The Japanese Yen's weakness can be attributed to several factors.

The country's massive trade deficit, which has been a persistent issue since the 1980s, is a significant contributor to the yen's weakness.

Japan's economy has struggled to find a balance between exports and imports, leading to a consistent trade deficit.

This has resulted in a decrease in the value of the yen, making imports more expensive and exports cheaper.

The Bank of Japan's (BOJ) monetary policies have also played a role in the yen's weakness.

The BOJ's decision to implement negative interest rates in 2016 further reduced the value of the yen.

The country's aging population and low birth rates have led to a decline in the workforce, resulting in a decrease in economic growth.

This has made it challenging for the government to implement policies that would strengthen the yen.

The yen's value is also influenced by the country's reliance on exports, particularly electronics and cars, which are sensitive to global demand.

A decline in global demand for these products can lead to a decrease in the value of the yen.

A weak yen has significant consequences for both consumers and businesses in Japan. The country's reliance on imported oil and gas means that the value of imports has jumped by 46% due to exchange rates and rising energy prices.

For consumers, a weak yen is a major problem. Their purchasing power has halved over the last decade, with the same amount of money buying significantly less today than it did ten years ago. For example, 10,000 yen would buy an item worth $132 ten years ago, but today it only gets you something worth $67.

Average salaries in Japan have hardly risen in over three decades, making it difficult for people to cope with the reduced purchasing power. This is especially true when they need to use the yen to pay for things overseas, such as when they travel or their children study abroad.

Japan's economy has been stuck in a rut for decades, with hardly any growth in the last three decades. This is a significant concern for the country's finances.

The country is the world's most indebted nation, which doesn't exactly inspire confidence. Its economy is struggling to recover from years of stagnation.

A low birth rate and an aging population are major issues Japan is facing. The proportion of older people in the country is the highest in the world.

The government has introduced some measures to address the issue, such as allowing foreign workers to enter the country. However, there is still strong opposition to immigration.

Experts like Takeshi Fujimaki, a former adviser to billionaire investor George Soros, believe the weak yen is a reflection of Japan's economic struggles.

A weak yen has a significant impact on both consumers and businesses in Japan. The country relies heavily on imported oil and gas, and the 46% jump in imports last month due to exchange rates and rising energy prices is a major concern.

Consumers in Japan have seen their purchasing power halved over the last decade. Ten years ago, 10,000 yen would buy an item worth $132, but today it only gets you something worth $67.

The issue is even more acute when people need to use the yen to pay for things overseas, for example when they travel or their children study abroad. This is a major problem for many Japanese families.

On the other hand, Japanese exporters are benefiting from the weak yen, as the money made abroad is worth a lot more back home. This is a significant advantage, especially since exports account for about 15% of the country's total economic activity.

Japan's weak yen is indeed good news for tourists, as their holiday money goes further. The country's currency has been sliding in value, making it a more attractive destination for visitors.

In 2019, Japan welcomed 32 million foreign visitors, who spent a staggering 5 trillion yen. Tourist numbers are still a long way from that level, but investment bank Goldman Sachs predicts inbound spending could reach 6.6tn yen within a year of the country fully reopening.

The yen has been losing value, and it's not just a matter of interest rates. The Bank of Japan has only just begun to ease off intense monetary stimulus, while the Federal Reserve is years into tightening cycles.

This difference in interest rates is a major factor in the yen's decline. The Bank of Japan has attempted to normalize monetary policy by lifting its benchmark interest rate out of negative territory, but these efforts have been dwarfed by the Fed's interest-rate hikes starting in 2022.

The yen has been on a continual slide since early 2021, and over the last three years, it has lost more than one-third of its value. This is a significant drop, and it's not just a small fluctuation.

The interest rate gap between the U.S. and Japan reflects the very different inflation environments in the two countries. Japan has struggled to get prices and wages to rise after decades of economic stagnation, while the U.S. has been battling to bring prices down amid robust economic growth.

Japan's low inflation rate is a major reason why it has maintained rock-bottom borrowing costs in an effort to shake the economy out of a prolonged stagnation known as "the lost decades." This has made Japan one of few countries that has kept interest rates low.

Here are some key statistics on the yen's decline: