Japan’s Weaker Yen Is Here to Stay—for Better or Worse

On Oct. 20, currency traders saw something that hadn’t happened since June 1990—the Japanese yen to U.S. dollar exchange rate eclipsed 150 to 1.

The yen has seen shocking depreciation over the past year. In January 2021, the rate was 103 to 1, which has been roughly the average exchange rate for the last 30 years. In September 2021, the rate hovered around 110 to 1, and it didn’t surpass 120 until the end of March 2022. But since then, the exchange rate has skyrocketed, only settling back down slightly to 140 to 1, which is about where it sits as of late November. It’s a new status quo for the yen after 30 years of consistency, and economists on both sides of the Pacific say it’s not going back to the old norm any time soon.

“The yen-dollar exchange rate is important to Japan because Japan relies on imports for energy and food,” said Takuya Hoshino, an economics researcher at Dai-ichi Life. “The depreciation of the yen leads to an increased financial burden on households and businesses.” The shift also sinks Japanese wages relative to the dollar, meaning that more Japanese go abroad to work and fewer foreign workers come to Japan. That’s a disastrous trend for Japanese industry, which has been facing severe labor shortages in most major sectors due to a shrinking population and mass migration from rural to urban areas.

On Oct. 20, currency traders saw something that hadn’t happened since June 1990—the Japanese yen to U.S. dollar exchange rate eclipsed 150 to 1.

The yen has seen shocking depreciation over the past year. In January 2021, the rate was 103 to 1, which has been roughly the average exchange rate for the last 30 years. In September 2021, the rate hovered around 110 to 1, and it didn’t surpass 120 until the end of March 2022. But since then, the exchange rate has skyrocketed, only settling back down slightly to 140 to 1, which is about where it sits as of late November. It’s a new status quo for the yen after 30 years of consistency, and economists on both sides of the Pacific say it’s not going back to the old norm any time soon.

“The yen-dollar exchange rate is important to Japan because Japan relies on imports for energy and food,” said Takuya Hoshino, an economics researcher at Dai-ichi Life. “The depreciation of the yen leads to an increased financial burden on households and businesses.” The shift also sinks Japanese wages relative to the dollar, meaning that more Japanese go abroad to work and fewer foreign workers come to Japan. That’s a disastrous trend for Japanese industry, which has been facing severe labor shortages in most major sectors due to a shrinking population and mass migration from rural to urban areas.

On Sept. 22, the Japanese government intervened for the first time in 24 years by buying yen and selling dollars. But a history of failed past interventions is a big reason why the Bank of Japan (BOJ) hasn’t taken aggressive action to defend the yen. “The only time the intervention efforts truly worked was when it was joint interventions with other G-7 nations,” Kathy Lien, a managing director at BK Asset Management, told CNBC. “The Bank of Japan and the Ministry of Finance have a history of failed interventions—we know it; they know it.”

And while Japan’s government and central bank have adamantly opposed too much intervention in the yen, the wide-ranging economic effects of this plummeting exchange rate status quo have hit Japan’s households hard. They also pose serious underlying questions about the path to renewed competitiveness for Japanese businesses and any hope of better wages for workers.

This interest rate gap has been the topic of much discussion. Bloomberg opinion columnists Daniel Moss and Gearoid Reidy note that raising interest rates would cause Japan’s pile of debt to surge, causing increased spending plans by the government to get thrown out the window and devastating households. As a result, Moss and Reidy argue that the BOJ is wiser to accept the weaker yen.

On the flip side, per journalist Leika Kihara at Reuters, Japanese policymakers are desperate to revive consumer demand and wage growth in 2023 to match inflation. Boosting Japan’s stagnant wages has also been a core policy objective of Japanese Prime Minister Fumio Kishida. “It’s a once-in-a-lifetime opportunity for Japan to finally see a positive wage-inflation cycle kickoff,” a source familiar with the BOJ told Reuters regarding a potential increase in interest rates.

Atsushi Nakajima, a consulting fellow at Japan’s Research Institute of Economy, Trade, and Industry, told Foreign Policy that interest rates aren’t the only factor in the spiraling yen. “The increase of costs in Japan’s massive imports of energy as well as food plus the deterioration of Japanese industry’s competitiveness compared to American and European businesses are also affecting the weaker yen,” Nakajima said.

 In the past, when the yen became weaker, the weak yen supported economic growth by encouraging exports. “But this time,” Nakajima said, “we’re not seeing as much of this effect because Japanese industry has globalized due to the shrinking market in Japan, so [the weak yen] is a much more of a mixed bag of pros and cons for businesses.” Japanese companies that can take home profits in U.S. dollars see their money go further. But Japanese companies that have big costs in imports are seeing those costs surge.

 Put simply, Japan’s import sector is suffering, whereas the export sector is benefitting—only not as much as you’d typically expect. The country’s huge automobile industry hasn’t been able to take advantage of the exchange rate because of constraints on acquiring semiconductors and other necessary components due to lingering supply chain issues from the COVID-19 pandemic. Still, other export sectors like information technology and the microprocessor industry have been able to take advantage. The pandemic-hit tourism sector is also a huge winner, with inbound tourists encouraged to visit and spend more money in Japan thanks to a favorable exchange rate.

In a list of pros and cons for a weaker yen, the cons certainly seem to outnumber the pros this time. The growth in purchasing power in Japan hasn’t kept up with a relatively low inflation rate, meaning that real wages are going down. This trend, combined with a weaker yen, results in a lower quality of life for ordinary Japanese people: The cost of goods is rising, wages aren’t, and the yen now purchases way less abroad than it used to. So far, the Japanese government has lessened the blow on households by pouring 3.5 trillion yen into energy and food subsidies, a hefty budgetary investment that can’t last forever.

“Some companies do have ‘inflation allowances’ that allow them to temporarily raise wages to compensate for price hikes,” Hoshino said. “[But] the increase in prices of necessities and energy makes it harder for personal consumption to increase.”

The weak yen further hurts companies by driving away foreign talent. Hundreds of thousands of foreign workers in Japan from countries like Nepal and Vietnam wire money to their home countries and are now struggling to support their families back home. Industries like food processing, agriculture, and manufacturing already heavily rely on foreign laborers, especially in rural areas. The exacerbated wage difference between Japan and other countries with labor market gaps, such as Germany and Australia, poses a real risk to companies that need these workers.

The government budget is also a victim of a sliding yen. A weaker yen means that foreign currency payments on defense equipment are a lot more expensive. The exchange rate also affects public works and infrastructure projects that rely on imported raw materials. And while the Ministry of Finance has funds set aside to compensate for exchange-rate fluctuations, agencies are already struggling to make ends meet, looking to trim low-priority budget items where possible.

“A historically weak yen plus the fear of geopolitical risk is good timing for Japan,” Nakajima explained. “The government intends to put trillions of yen to advance high-tech industries, so this kind of support of the government can both reduce future risks and provide better possibilities for growth.”

These major investments offer some hope to help begin correcting Japan’s weakened economic competitiveness. However, many of the problems are more structural. Per a recent study by Takeshi Makita at the Japan Research Institute, the biggest factors for Japan’s decline in business competitiveness are slow-to-react management, a lack of enthusiasm for and understanding about digital technology, and a delayed response to globalization.

“The growth of added value, or productivity, in Japan has been weaker for the last 20 years. The result is that many Japanese companies are seeing their profit margins getting reduced, which means that they can’t raise the wage for employees either,” Nakajima said.

“What is required are reforms that improve Japan’s underlying efficiency,” writes Richard Katz, a senior fellow at the Carnegie Council for Ethics in International Affairs. “The Kishida administration is set to issue a five-year plan that could do a lot to improve the situation if lofty goals about income distribution and nurturing startups are turned into concrete policies. Unfortunately, recent conversations with policymakers in Tokyo suggest that, while a few of the necessary positive steps will be taken, they will not be nearly enough to turn the ship around.”

With Kuroda’s refusal to nudge interest rates, for better or worse, the weaker yen is here to stay. And although the current situation for Japanese people on the ground isn’t as bad as it could be given the lower yen, a trend that started under former Japanese Prime Minister Shinzo Abe’s famous Abenomics continues: Ordinary people in Japan are simply getting poorer, even as the economy and corporate profits grow overall.

Employment is high, but wages aren’t going up; interest rates are low, but households hoard their savings; the GDP has grown, but productivity has failed to keep up. And now with the plummeting exchange rate, the cost of food and utilities are spiking.

“I don’t foresee a change in the current situation with the yen in the coming months,” Nakajima said. “My interest is in the measures pushed by the government to improve the competitiveness of Japanese industry. That’s what matters more.”