What’s Behind the Weakness in the Japanese Yen?
The weakness in the Japanese yen has recently become a growing concern for the country’s financial officials and policymakers, as the currency has been responsible for driving up the cost of living for households and driving up import prices. Indeed, as of April this year, the Yen slid to its lowest level against the US Dollar since July 2024, and in order to prop up the currency, financial authorities spent a record amount for a one month period of US$ 74 billion — which in turn was a catalyst for a sharp rebound.
By late April, however, the Yen’s rebound proved short-lived, and renewed weakness pushed the currency to its lowest level against the US dollar since 1986. This plunge exposed the limits of intervention without a significant shift in monetary policy from the Japanese government and the Bank of Japan (BOJ). Currency traders are worried that the Ministry of Finance might delve deeper into the country’s foreign exchange reserves (data shows this figure to be USD 1.09 trillion as of 31st May this year) as the Minister of Finance Satsuki Katayama was noted as saying, “authorities will take the appropriate and bold action at any time should the need arise”.
Experts advise that there are a number of reasons behind the weakness of the Yen, and the one that stands out the most is the difference between Japan’s extremely low interest rate and higher interest rates in the United States, the United Kingdom and other advanced economies. The inevitable outcome has been investors borrowing an exceedingly cheap Yen and then investing in higher yielding assets in many overseas economies, which translates into capital outflows from the Japanese economy, thereby putting downward pressure on the Japanese Yen. It should be noted that last month, the BOJ did in fact raise its interest rate by 25 basis points to 1.00%, the highest in 31 years, but analysts have been quick to point out that by international standards the Benchmark interest rate still remains low.
Analysts also highlight Japan’s national debt, which stands at over 200% of GDP—the highest among G7 nations and major economies. This heavy debt burden, combined with an ongoing deficit, has fueled investor concern over the government’s fiscal discipline and continued overspending, ultimately eroding confidence in Japanese assets and the yen. Another problem for the Japanese Yen and the economy is the US/Iran/Israel conflict currently raging in the Middle East. Data shows that Japan currently imports more than 95% of its oil requirements from the Middle East, meaning the country is exposed to disruptions in the Strait of Hormuz**. Japan pays in US dollars for their oil, and an increase in the price of crude means an increase in demand for the US Dollar at the expense of the Yen.
*Group of Seven / G7 – This is an informal political forum for the leaders of seven advanced democratic economies being Canada, France, Germany, Italy, Japan, United Kingdom and the United States. Originally it was known as the G8 until Russia was suspended in 2014 for the annexation of Crimea. The group meets annually to discuss and coordinate policy on major global issues such as economic governance, international security and climate change. The leader of the European Union (currently Ursula von der Leyen) has an unofficial seat at the table, enjoys all the privileges and is often dubbed the 8th member.
**Strait of Hormuz – A strategically vital narrow waterway connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea. It serves as the world’s most critical chokepoint with roughly 25% – 30% of global crude oil supplies and 20% of global LNG (Liquified Natural Gas) supplies passing through its waters.
There are a number of options open to the government to support the Yen, the first being intervention in the form of the BOJ buying the Yen and using foreign currency reserves, the second being to raise interest rates again by tightening monetary policy, narrowing the differential in interest rates between Japan and the US, thereby making assets denominated in Yen more attractive. Over the longer term, fiscal reform such as reducing the oversized and still growing national debt and curbing government spending would, analysts suggest, increase investor confidence in the country’s public finances and improve the appeal of assets denominated in Japanese Yen.
