The continuous depreciation of the Japanese yen reflects the deep-seated difficulties of the Japanese economy (economic perspective)

Recently, with the sharp rise in international oil prices, the pressure on the depreciation of the Japanese yen has further increased, reaching a level of 160.45 yen per US dollar, crossing the 160 "threshold" - which is widely regarded by the market as a warning line for the Japanese government's intervention in the foreign exchange market. Officials from the Japanese Ministry of Finance have stated that they will intervene in the exchange rate, and the Bank of Japan has also stated that it will continue to raise interest rates. According to data from the Bank for International Settlements, the real effective exchange rate of the Japanese yen has shrunk by more than two-thirds from its historical high in 1995 (193.95, based on 2020) to 67.73. From the "Lost 30 Years" to the current coexistence of high inflation and negative growth, the continuous depreciation of the Japanese yen is due to a serious lack of economic growth momentum in Japan.

Firstly, input inflation exacerbates the burden on people's livelihoods. The current round of yen depreciation began with the Federal Reserve's aggressive interest rate hike in 2022, and the rapid expansion of the Japan US interest rate differential led to capital outflows. The yen exchange rate plummeted sharply, with a drop of over 30% from January to October 2022 alone. Due to Japan's high dependence on imports for energy resources, the sharp drop in exchange rates has directly pushed up import costs. As of February this year, the Bank of Japan's import price index has reached 167.3 (based on 2020). The rapid transmission of input inflation to the consumer end has led to the rare occurrence of the Japanese Consumer Price Index exceeding the policy target of 2% for four consecutive years. Even more concerning is that Japan's food self-sufficiency rate (in terms of calories) has dropped to the lowest level among major developed countries, and the skyrocketing food prices have pushed the Engel coefficient (the proportion of food expenditure to consumption expenditure) of households with two or more people to climb to 29.4% in the third quarter of 2025, reaching a new high since 1981. The people's wallets have shrunk, their quality of life has significantly declined, and social anxiety has spread.

Secondly, the lagging growth of real wages has constrained the recovery of domestic demand. Faced with inflationary pressures, Japanese trade unions are promoting a wage increase movement, with nominal wage increases exceeding 5% continuously from 2024 to 2025, but still unable to keep up with the pace of price increases. According to statistics from the Ministry of Health, Labour and Welfare in 2025, after excluding price factors, Japan's real wages have experienced negative growth for four consecutive years. As a result, residents' actual consumption expenditure continued to decline in 2023 and 2024, and although it turned into growth in 2025, it remained in a weak state of 0.9%. For the Japanese economy, where domestic demand accounts for more than half of GDP, the shrinking and weak purchasing power of residents is a fatal blow, and the economic recovery lacks a solid foundation.

Furthermore, the difficulty of policy coordination has increased, and the fiscal deficit has worsened. In history, the depreciation of the yen was a booster for Japan's export-oriented economy, but now its negative effects far outweigh the positive dividends. In response to exchange rate fluctuations and inflationary pressures, the Bank of Japan has ended its large-scale monetary easing policy, including negative interest rates, and gradually raised interest rates to 0.75%, the highest level since 1995. However, curbing the depreciation trend of the Japanese yen is not an easy task. The Japanese policy authorities themselves have serious differences of opinion, and the central bank has attempted to further raise interest rates but has been opposed by the government. The government of Gaoshi Zaomiao insists on implementing a fiscal expansion route, promising large-scale tax reductions (such as "zero consumption tax on food") and increasing defense budgets, which will further worsen the fiscal deficit. The market's concern about Japan's financial situation triggered the selling of treasury bond, and the yield of 10-year treasury bond soared to a 27 year high in January this year. The "double kill" situation between the bond market and the foreign exchange market has put the Bank of Japan in a dilemma between raising interest rates to curb inflation and preventing the outbreak of a debt crisis.

In addition, the United States' attitude towards the depreciation of the yen is becoming increasingly tough. In March 2025, US President Trump publicly criticized the depreciation of the yen, raising concerns in Japan about the "Second Plaza Accord". US Treasury Secretary Besson has repeatedly reiterated that the exchange rate is the subject of US Japan tariff negotiations. The US Treasury Department's exchange rate policy report directly requires the Bank of Japan to "respond to fundamentals such as economic growth and price increases with monetary tightening policies," and to put Japan on a "watch list" of currency manipulation countries. Recently, the United States has even directly put pressure on Japan by launching an exchange rate verification mechanism in the New York foreign exchange market to prevent risks such as yen depreciation and interest rate hikes. At the same time, the radical shift in Japan's foreign policy has led to tensions in neighboring relations, hindered the recovery of inbound consumption, and widened the digital trade deficit. In addition, the global energy price fluctuations caused by recent geopolitical conflicts have made the external environment facing the Japanese economy increasingly severe.

The depreciation of the Japanese yen is not only a monetary issue, but also a microcosm of the structural contradictions in the Japanese economy. Against the backdrop of worsening aging, unresolved industrial hollowing out, and insufficient innovation momentum, relying solely on monetary easing or fiscal overdrafts is no longer enough to reverse the decline. If we cannot fundamentally reshape the endogenous driving force of economic growth, streamline the coordination mechanism of fiscal and monetary policies, and curb the impulse of strong military expansion, the Japanese economy may sink deeper and deeper into the quagmire of "low growth, high debt, and weak currency".