TOKYO –
The yen has weakened to the 162 vary in opposition to the dollar for the primary time in about 40 years, however the newest market setting differs sharply from the interval 4 many years in the past, when Japan was nonetheless climbing towards the peak of its financial energy.
The yen final traded round 162 to the dollar in 1986, a yr remembered in Japan for a public fascination with Halley’s Comet, which made its closest method in 76 years, and the hit launch of Fujifilm’s world’s first disposable digital camera with a built-in lens. It was additionally the beginning of the bubble economic system and a section during which the yen was strengthening.
Japan’s financial affect on the time was so nice that the nation was described abroad as “Japan as No. 1.”
This yr, Japan has celebrated the gold medal gained by determine skating pair Riku Miura and Ryuichi Kihara, often known as RikuRyu, in addition to pleasure over the soccer World Cup. Economically, nevertheless, the nation is more and more being seen from overseas as “Cheap Japan,” because the weaker yen makes nearly every part seem cheap to overseas guests and traders.
The causes behind the yen’s steep decline embody the rate of interest hole between Japan and the United States, with dollar-denominated property providing increased returns, in addition to considerations over expansionary fiscal coverage. But analysts say there may be one other, longer-term issue.
Masashi Hashimoto of the Institute for International Monetary Affairs stated Japan’s declining worldwide competitiveness has change into a structural driver of yen weak point.
The decline is seen in commerce knowledge. In 1986, Japan had a commerce surplus of greater than 13 trillion yen, making it the world’s largest trade-surplus nation. By 2025, Japan had posted a commerce deficit of almost 3 trillion yen, that means it paid extra for imports than it earned from exports.
The shift can be clear in international company rankings. In 1989, when firms had been ranked by complete market capitalization, NTT held the highest spot, adopted by Japanese banks that occupied the remainder of the highest 5. Japan, then often known as a technology-driven industrial energy, had 32 firms within the international prime 50, together with automakers, electronics makers and different producers.
In the 2026 rankings, nevertheless, U.S. firms dominate the highest 5, led by semiconductor maker Nvidia in first place and Apple in second. No Japanese firm seems within the prime 50.
Hashimoto stated that as Japan loses competitiveness, fewer patrons around the globe buy Japanese merchandise, lowering demand for the yen and pushing the foreign money decrease over the long run.
The causes Japan has misplaced competitiveness could be seen in in the present day’s company rankings. Most of the highest 10 firms are concerned in AI, semiconductors important to AI, or main IT companies used broadly in Japan and around the globe.
While the United States has achieved development via digital industries, Japan has but to discover a clear pillar for financial enlargement.
The Takaichi administration plans to make greater than 370 trillion yen in public- and private-sector investments throughout 17 fields because the core of its development technique.
Hashimoto stated that if Japan can create new development industries, it might assist halt the yen’s downward development. But he additionally warned that if large-scale funding fails to supply outcomes, considerations over worsening public funds might as a substitute improve the chance of additional yen weak point.
The query is whether or not Japan can discover a new engine of development and transfer past “Cheap Japan” to as soon as once more be known as “Japan as No. 1.”
The yen’s weak point just isn’t merely the results of foreign money merchants betting in opposition to Japan. It displays a deeper shift in how cash strikes via the Japanese economic system. For many years, Japan earned overseas foreign money by exporting vehicles, electronics, equipment and high-value manufactured items. Those exports created demand for yen, as a result of abroad patrons wanted Japanese foreign money to pay Japanese firms. But as Japan’s commerce place has weakened, that pure assist for the yen has additionally light.
One of the most important modifications is vitality. Japan imports most of its oil, pure fuel and coal, and people commodities are usually priced in {dollars}. When vitality costs rise, Japanese firms should purchase extra {dollars} to pay for imports. That pushes down the yen. The downside grew to become extra extreme after the Fukushima nuclear catastrophe in 2011, when Japan shut down many nuclear reactors and have become extra depending on imported gas for energy technology. Even when the nation runs a present account surplus via revenue from abroad investments, the commerce facet of the economic system can nonetheless weigh closely on the foreign money.
Food and uncooked supplies add to the stress. Japan imports giant volumes of grain, animal feed, meat, seafood, fertilizers and industrial inputs. A weaker yen makes these imports costlier, which raises prices for households and corporations. Higher import prices then scale back buying energy at house, making it more durable for consumption to drive development. In that sense, the weak yen is each a symptom and a reason behind financial weak point.
Interest charges are one other main motive. The United States has stored rates of interest far above Japan’s ranges, making dollar property extra engaging to international traders. Even after the Bank of Japan raised charges, Japan’s coverage fee stays a lot decrease than U.S. charges. Investors can borrow cheaply in yen and transfer cash into higher-yielding dollar property, a technique often known as the yen carry commerce. As lengthy as that rate of interest hole stays huge, the yen faces downward stress.
The Bank of Japan can be constrained. Raising charges sharply might assist the yen, however it could danger hurting households, small companies and closely indebted firms. It would additionally increase the federal government’s personal borrowing prices. Japan has one of many world’s largest public debt burdens, so increased rates of interest might shortly improve the price of servicing that debt. That makes markets query how far the BOJ can actually go in defending the foreign money.
Government funds have change into a part of the foreign money story. Investors are watching whether or not Japan can fund giant spending applications with out undermining confidence in its fiscal place. Expansionary fiscal coverage can assist development within the brief time period, but when markets imagine spending just isn’t tied to increased productiveness or future tax income, it may possibly weaken confidence within the yen. That is why the Takaichi administration’s development technique carries each alternative and danger: profitable funding in new industries might strengthen Japan’s development outlook, however ineffective spending might deepen concern about debt and push the yen decrease.
The construction of Japanese business has additionally modified. In the Nineteen Eighties, Japanese firms had been international leaders in vehicles, shopper electronics, semiconductors, finance and precision manufacturing. Today, Japan nonetheless has world-class corporations in autos, manufacturing facility tools, supplies, robotics and parts, nevertheless it has misplaced floor within the digital platforms, software program ecosystems, cloud computing and AI infrastructure that now dominate international markets. The firms commanding the very best valuations are people who management knowledge, chips, working techniques, digital promoting, cloud companies and AI fashions. Japan has suppliers inside these provide chains, however fewer firms on the middle of them.
That issues for the yen as a result of currencies are supported not solely by exports, but in addition by expectations of future development. Investors purchase the currencies of nations the place they anticipate robust earnings, innovation and capital returns. If Japan is seen as a rustic with growing older demographics, sluggish wage development, weak productiveness beneficial properties and restricted digital champions, international traders are much less prone to deal with the yen as a development foreign money.
Demographics add one other layer. Japan’s shrinking and growing older inhabitants limits home demand and makes labor shortages extra extreme. A smaller workforce can scale back potential development except productiveness rises shortly sufficient to offset it. Companies dealing with labor shortages might put money into automation, however many small and midsize corporations lack the capital or digital capability to rework their operations. Without stronger productiveness development, Japan’s economic system struggles to generate the type of momentum that will assist a stronger foreign money.
The weak yen does assist some exporters by lifting the yen worth of abroad income. Automakers and producers with giant overseas gross sales can profit when earnings from the United States, Europe or Asia are transformed again into yen. But the benefit is much less highly effective than it as soon as was as a result of many Japanese firms now produce abroad moderately than exporting immediately from Japan. That means a weaker yen not creates the identical broad export growth it did in earlier many years.
Tourism is one space the place the weaker yen has clearly helped. Foreign guests discover accommodations, eating places, transport and purchasing cheaper in Japan than they’d at a stronger trade fee. Inbound tourism brings overseas cash into native economies, particularly in main cities and regional locations. But tourism alone can’t change the financial power as soon as generated by globally dominant producers and expertise corporations. A rustic can’t construct long-term foreign money energy solely on being cheap.
The danger is that Japan turns into trapped in a cycle during which the weak yen raises import prices, increased prices squeeze households, weak consumption limits development, and sluggish development retains traders cautious concerning the yen. Breaking that cycle requires greater than foreign money intervention. It requires increased productiveness, stronger wage development, globally aggressive industries, steady vitality coverage and credible fiscal administration.
Currency intervention can sluggish speedy strikes, nevertheless it can’t reverse a long-term development by itself. Japan has intervened available in the market earlier than by promoting {dollars} and shopping for yen, however such motion normally works solely quickly except the underlying forces additionally change. If the rate of interest hole, commerce deficit, vitality dependence and competitiveness issues stay, markets might proceed to check how far the yen can fall.
The central query is whether or not Japan can flip the weak yen from a warning signal right into a catalyst for reform. If firms use the foreign money benefit to develop exports, increase wages, put money into expertise and construct new international companies, the yen’s decline might ultimately assist reset the economic system. But if the weak yen merely makes Japan cheaper with out making it extra productive, the phrase “Cheap Japan” might change into more durable to shake.
Source: TBS