The Shock of the Weak Yen for the First Time in 40 Years: Can Japan Escape Being a "Cheap Country"?

The Shock of the Weak Yen for the First Time in 40 Years: Can Japan Escape Being a "Cheap Country"?

The Shock of Yen Depreciation in 40 Years: How Should Japan Face the "Weak Yen"?

The yen exchange rate has once again sunk to historically low levels. With the yen being sold to levels exceeding 160 yen per dollar, reaching levels not seen since the mid-1980s, there is heightened vigilance in the financial markets regarding potential currency intervention by the Japanese government and the Bank of Japan. As reported by Brazil's economic media InfoMoney, this yen depreciation is not merely a temporary speculative move but a complex phenomenon intertwined with factors such as the Japan-U.S. interest rate differential, the strength of the U.S. economy, the pace of interest rate hikes by the Bank of Japan, oil prices, and the evaluation of the Japanese economy itself.

What is crucial about the current yen depreciation is not the figure "160 yen per dollar" itself, but the fact that the market is testing this level as the limit line for Japanese authorities. In 2024, the 160 yen level was a symbol of intervention caution. However, the market in 2026 is pushing even further. Despite the authorities having already conducted massive yen-buying interventions, they have not been able to completely halt the yen's depreciation trend. In other words, the market is trying to determine "how serious Japan is about defending the yen."


Interest Rate Differential Is Not the Sole Cause of Yen Depreciation

When explaining yen depreciation, the most commonly used factor is the Japan-U.S. interest rate differential. If U.S. interest rates are high and Japanese rates are low, investors sell yen to buy dollars to earn higher yields. This is a simple structure and is also the basic principle of the so-called carry trade.

However, the current yen depreciation cannot be explained by this alone. The Bank of Japan has already been moving towards normalizing its monetary policy, raising the policy interest rate target to around 1.0% by June 2026. Still, the yen did not significantly appreciate. This reflects the market's true sentiment. Investors perceive that "the Bank of Japan is raising rates, but not enough to close the gap with the U.S."

Furthermore, the unexpectedly robust U.S. economy is also supporting the strong dollar. If employment and consumption remain stable and concerns about a resurgence of inflation persist, the Federal Reserve is unlikely to rush into rate cuts. In some cases, expectations for additional rate hikes may even emerge. If that happens, the dollar will become easier to buy again, and the yen easier to sell.

On the other hand, in Japan, despite wage increases and rising prices, there are still doubts about the strength of personal consumption. Even if corporate earnings are strong, households are sensitive to increases in food, energy, dining out, and travel costs. If the Bank of Japan raises rates sharply, it will have a significant impact on mortgage loans, corporate borrowing, and government bond interest payments. In other words, Japan wants to stop yen depreciation but finds it difficult to raise rates quickly. The market sees through this policy dilemma.


Currency Intervention Can "Buy Time" but May Not Change the Trend

The Japanese government has conducted yen-buying interventions in the past. From April to June 2024, interventions totaling about 9.8 trillion yen were carried out, and from late April to late May 2026, foreign exchange operations totaling about 11.7 trillion yen were announced. Judging by the amount alone, the authorities' seriousness is substantial.

However, there are limits to intervention. If the government sells dollars and buys yen, it will move in the direction of yen appreciation in the short term. It can also cause losses to speculators and make the market think "further yen selling is dangerous." Especially if conducted during times of low liquidity or around U.S. holidays, it can have a significant impact on the market.

However, intervention is not a policy that changes the fundamental strength of the currency. If the Japan-U.S. interest rate differential remains, U.S. yields are attractive, and expectations for Japan's growth are weak, yen selling pressure will return. Intervention can act as a brake to slow down the market's speed, but it does not flatten the slope itself.

Therefore, the focus going forward is shifting from "whether there will be intervention" to "what policy messages the Bank of Japan and the government will issue after the intervention." If it's just a one-off intervention, yen appreciation may lose momentum in a few days to weeks. On the other hand, if intervention is accompanied by heightened expectations for additional rate hikes by the Bank of Japan and a return of rate cut expectations in the U.S., the trend of yen depreciation could significantly reverse.


Three Notable Reactions on Social Media

On social media, there are three prominent reactions to the current yen depreciation.

The first is a market-oriented reaction asking, "Where is the authorities' defense line?" While 160 yen per dollar has been seen as a psychological threshold, there is a view that the market might test levels around 161 yen, 162 yen, and even close to 163 yen. Posts by traders and individual investors focus more on "at what level and at what time will intervention occur" rather than "whether intervention will happen." In other words, yen depreciation itself is news, but the speculation around intervention becomes a theme for short-term trading.

The second is anxiety about defending one's livelihood. On social media, there are many voices expressing concerns about overseas travel becoming more distant, imported food becoming more expensive, and the burden of gasoline and electricity costs increasing. While yen depreciation tends to benefit export companies and those with significant overseas sales, it rebounds as import inflation for households. Especially since Japan relies heavily on overseas energy and food, yen depreciation gradually affects the prices of essential goods.

The third is a complex perception that "Japan has become a cheap country for foreigners." For inbound tourists, yen depreciation is a tailwind, enhancing the sense of affordability for lodging, dining, and shopping. In fact, the number of inbound tourists remains high. On the other hand, from the perspective of Japanese people, overseas travel becomes more expensive, imported goods become pricier, and domestic tourist spots feel the price increases due to inbound demand. On social media, there are simultaneous voices welcoming the inbound boom and expressing dissatisfaction that "Japanese people find it harder to enjoy Japan."


The Pros and Cons of Yen Depreciation from a Japanese Perspective

For the Japanese economy, yen depreciation is not universally bad. For companies with high overseas sales ratios, such as in the automotive, machinery, electronic components, and semiconductor sectors, yen depreciation boosts profits. When dollar-denominated earnings made overseas are converted to yen, they increase, which tends to positively impact corporate earnings reports. In the stock market, yen depreciation can also be a factor driving up Japanese stocks.

Moreover, yen depreciation is a tailwind for inbound consumption. From the perspective of foreign tourists, Japanese hotels, dining, transportation, and shopping appear more affordable. The benefits extend to local tourist spots, department stores, drugstores, dining, retail, and transportation-related sectors.

However, the problem is that these benefits do not spread evenly across Japan. While large exporting companies and tourist areas thrive, small and medium-sized enterprises that cannot fully pass on import costs struggle. Households also become effectively poorer if wage increases do not keep up with price rises. If the improvement in corporate earnings due to yen depreciation does not sufficiently lead to wage increases or domestic investment, the disconnect of "stock prices rise but life is tough" will intensify.

The most serious issue from a Japanese perspective is that yen depreciation is felt as a decline in the purchasing power of the people. During the era of yen appreciation, overseas products and travel could be enjoyed cheaply. Now, conversely, foreign goods and services have become more distant. This is not merely a currency issue but also a problem of Japan's wage levels, growth potential, and international purchasing power.


Future Scenario 1: Temporary Yen Appreciation Through Intervention

The most likely short-term occurrence is yen-buying intervention by the government and the Bank of Japan. Especially if the dollar-yen rises rapidly and speculative movements become prominent, the authorities are more likely to intervene. The Ministry of Finance's foreign currency reserves remain large, and the capacity for intervention is still there.

In this case, the dollar-yen could temporarily fall by several yen. For example, it could drop sharply from the 162 yen level to the 158 yen level, or possibly even to the 155 yen level. However, if U.S. interest rates remain high and expectations for additional rate hikes by the Bank of Japan are weak, yen appreciation is unlikely to last long. The market will likely look for another opportunity to sell yen.


Future Scenario 2: Strengthened Expectations for Additional Rate Hikes by the Bank of Japan, Easing Yen Depreciation

A more sustainable suppression of yen depreciation would be a scenario where expectations for additional rate hikes by the Bank of Japan strengthen. In its June policy change, the Bank of Japan indicated its willingness to raise policy rates in response to economic and price conditions, considering that the underlying inflation rate is approaching 2% and the financial environment remains accommodative.

If wage increases continue, consumption does not collapse significantly, and the underlying trend of prices is judged to be strong, the possibility of additional rate hikes will increase. In this case, the market will be more inclined to buy back yen. Particularly if rate cut expectations emerge in the U.S., the narrowing of the Japan-U.S. interest rate differential will be noted, increasing pressure towards yen appreciation.

However, for the Bank of Japan, rapid rate hikes also carry significant risks. Considering the impact on mortgage rates, corporate funding costs, and the government bond market, the pace of rate hikes will inevitably be cautious. Therefore, even in this scenario, yen appreciation is likely to be gradual.


Future Scenario 3: Further Yen Depreciation Leading to Political Issues

The most concerning scenario is one where yen depreciation does not stop and becomes a political issue linked to rising living costs. If the dollar-yen moves towards 165 yen or 170 yen, it will not just be market news. It will have widespread impacts on import prices, electricity and gas rates, food prices, overseas travel costs, and corporate procurement costs.

On social media, at the 160 yen level, discussions are centered on "whether there will be intervention" from a financial market perspective, but if 170 yen comes into view, the conversation is likely to shift to societal issues like "we can't afford to live" and "Japan's purchasing power is declining." For the government, multiple responses such as price measures, subsidies, wage policies, tax systems, and energy policies will be necessary.

In this scenario, verbal intervention by the government alone will be insufficient to stop the market. A comprehensive response combining actual intervention, additional rate hikes by the Bank of Japan, fiscal policy, and growth strategies will be required.


What Should Investors Watch?

Individual investors should pay attention to four key indicators going forward.

The first is U.S. employment statistics and inflation indicators. If the U.S. economy is strong, the dollar is likely to remain strong, and yen depreciation pressure will persist. The second is statements from the Bank of Japan. Messages that are positive about additional rate hikes will be a factor for yen appreciation. The third is the Ministry of Finance's intervention records. Since actual interventions are disclosed later, it is important to confirm them after sudden market changes. The fourth is oil prices. As Japan is an energy-importing country, a combination of high oil prices and yen depreciation can negatively impact the trade balance and household burdens.

From an asset management perspective, holding foreign currency-denominated assets during a yen depreciation phase can be a certain defensive measure. However, if you heavily shift to foreign currencies now, you may incur losses if sudden yen appreciation occurs due to intervention or rate hikes by the Bank of Japan. The key is to maintain a balanced portfolio of yen, dollars, Japanese stocks, overseas stocks, bonds, and cash, and not to bet too heavily in one direction of the exchange rate.


Is Yen Depreciation a "Sell-off of Japan"?

Some call the current yen depreciation a "sell-off of Japan." However, the reality is a bit more complex. Foreign funds are flowing into Japanese stocks, and there is buying interest in AI, semiconductor-related, export companies, and tourism-related sectors. In other words, not all of Japan's corporate value is being denied.

The real issue is that the attractiveness of the yen as a currency is relatively declining. Low interest rates, low growth, trade deficits, energy import dependency, fiscal concerns, and population decline. When these factors overlap, the reasons to actively buy yen weaken. Companies may be attractive, but the currency is weak. This split symbolizes the current Japanese market.

To truly stop yen depreciation, intervention alone is not enough. It is necessary to increase industries that can earn in Japan, sustain wage increases, expand domestic investment, and create an environment where overseas entities want to hold yen. The exchange rate is not only a result of monetary policy but also an evaluation of a country's growth potential.


Conclusion: The 160 Yen Level Is Not Just a Milestone, but a Warning to the Japanese Economy

The yen depreciation to the 160 yen level per dollar is not just a currency news story. It is a warning signal occurring at the intersection of Japan's prices, wages, corporate earnings, tourism, investment, fiscal policy, and monetary policy.

In the short term, intervention by the government and the Bank of Japan may lead to yen appreciation. In the medium term, additional rate hikes by the Bank of Japan and a shift in U.S. monetary policy will be key to suppressing yen depreciation. However, in the long term, unless the growth potential of the Japanese economy itself is enhanced, the weakness of the yen will repeatedly become an issue.

Yen depreciation is a tailwind for export companies and inbound tourism but a burden for households. If the sense of economic division intensifies as stock prices rise but the living experience worsens, what is needed now is not just to temporarily defend the yen. It is to rebuild the foundation of the Japanese economy that supports the value of the yen.

The market is already questioning Japan. Will the yen depreciation to the 160 yen level be merely passed off as a market milestone? Or can it be a turning point for Japan to regain growth potential and purchasing power? The answer lies not in the timing of intervention but in the subsequent policies and actions of companies and households.


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