Why Is Yen Worth So Little and How It Affects the Economy

The Japanese yen has been steadily losing value against other major currencies in recent years. This is largely due to the country's aging population and low birth rates, which have led to a shrinking workforce and decreased economic growth.

The yen's value is also influenced by Japan's trade deficit, which has been caused by the country's reliance on imports to meet its economic needs.

As the yen's value decreases, it makes imports more expensive for Japan, which can lead to higher prices for consumers and a decrease in the country's standard of living.

Japan's large trade deficit has also led to a significant increase in the country's foreign debt, which can make it more difficult for the country to recover from economic downturns.

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The yen's weakness can be attributed to Japan's ultra-loose monetary policy, which has kept interest rates near zero or even negative for decades.

This policy has led to a wide interest rate gap between Japan and other economies, making the yen less attractive to international investors.

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The Bank of Japan (BOJ) has hesitated to raise interest rates despite inflationary pressures, maintaining an accommodative stance to support economic growth.

The BOJ's reluctance to raise interest rates has resulted in capital outflows from Japan, further weakening the yen.

Japan's benchmark interest rate remains low at 0.5%, while the U.S. rate stands much higher at 5.25–5.50%, encouraging investors to move capital out of yen and into higher-yielding U.S. assets.

The yen has become less attractive to international investors due to its historically low interest rates, making it a less appealing option for investors seeking higher returns.

The "carry trade" has exacerbated the yen's decline, as investors borrow yen at low interest rates and invest in higher-yielding assets in other countries.

This practice increases the supply of yen in global markets, driving its value down.

The widening interest rate gap has been a key driver of the yen's depreciation, making it one of the weakest-performing major currencies in recent years.

The yen's weakness has been further exacerbated by Japan's structural issues, such as low wage growth, weak domestic consumption, and an aging population, which make aggressive tightening difficult for the BOJ.

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The government and central bank have indeed taken steps to address the yen's weakness. The Ministry of Finance and the Bank of Japan (BOJ) have intervened multiple times, spending billions to support the yen, but these actions have failed to reverse the downward trend.

In 2022 and 2024, Japan spent around $60 billion on FX interventions, which provided short-term relief but didn't address the core issue. The interest rate differentials remain a significant problem.

The BOJ raised rates cautiously to 0.5% by January 2025, the first time in 17 years. Governor Kazuo Ueda signaled willingness to hike further if sustainable inflation and wage growth emerge.

However, the BOJ remains cautious, wary of derailing Japan's fragile recovery. Their gradual pace reflects past experiences and the country's deep-rooted economic issues.

Japanese Finance Minister Shunichi Suzuki has been issuing verbal warnings to put a floor under the yen, but the authorities have not taken direct action in the market. The last time they intervened was in 2022.

US Treasury Secretary Janet Yellen said that any intervention by Japan to prop up the yen would be understandable if it were aimed at smoothing out volatility – not at affecting the absolute level of the exchange rate.

The BOJ's ultra-loose monetary policy has kept interest rates near zero or even negative for decades, contributing to the yen's decline. Major central banks like the U.S. Federal Reserve and the European Central Bank have implemented aggressive interest rate hikes to combat rising inflation.

The BOJ raised its short-term policy rate from 0.25% to 0.5% in January 2025, marking the highest level in 17 years, but it remains significantly lower than interest rates in the U.S. and Europe.

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The economic impact of a weak yen is a mixed bag for Japan. Exporters profit as overseas earnings convert to more yen, but this comes at a cost for consumers who face rising import costs and inflation.

Households pay more for imported energy, food, and goods, with average Japanese families spending around ¥90,000 (about $590) more annually due to the weaker yen.

A weak yen creates real pain for consumers through rising import costs and worsens inflation without boosting domestic demand, making it a tough balancing act for policymakers.

Here are the benefits and drawbacks of a weak yen:

The yen's prolonged decline has far-reaching effects on global trade, investment flows, and market sentiment, making it essential for policymakers to address the issue.

The yen's value is influenced by two main factors: its prospects for the future and the primary drivers behind its weakness. Certain analysts think the yen will stay weak as long as the BOJ maintains rates low.

The BOJ's ultra-loose monetary policy, including negative interest rates from 2016 to March 2024, has contributed to the yen's weakness. Japan's benchmark interest rate remains low at 0.5%, while the U.S. rate stands much higher at 5.25–5.50%.

This wide interest rate gap encourages investors to move capital out of yen and into higher-yielding U.S. assets, putting continuous downward pressure on the yen.

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The yen's recent decline is not a new phenomenon. Over the last three years, the yen has lost more than one-third of its value.

This is a significant drop, bringing the currency back to where it was following the collapse of a huge asset bubble in the early 1990s.

Japan's economy is still struggling to recover from a prolonged stagnation known as "the lost decades". The BOJ's recent interest rate hike is a step in the right direction, but the country is still an outlier globally.

The US Fed's recent signals have dampened expectations that significant interest rate cuts are on the cards this year amid persistently stubborn inflation.

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As we look to the future, certain analysts believe the Japanese Yen will stay weak as long as the BOJ maintains low interest rates. This suggests that the current economic landscape is unlikely to change anytime soon.

However, if inflation increases in Japan, the BOJ might have to boost interest rates, which would strengthen the yen. This highlights the delicate balance between economic growth and currency value.

Long-term economic changes could enable Japan to restore the value of its currency, the yen. This is a promising prospect, but it's uncertain when or if this will happen.

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