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Anyone at Japan’s Ministry of Finance planning a year-end vacation spent Wednesday scouring airline and hotel cancellation rules. On that day, the yen plunged toward 155 to the dollar, all but ensuring currency intervention.
By now, currency traders are familiar with the routine surrounding yen weakness. Like clockwork on Wednesday (November 12), Japanese Finance Minister Satsuki Katayama was warning foreign exchange dealers not to test her resolve as the yen hit its lowest levels in nine months.
“We’re seeing one-sided, rapid currency moves of late,” Katayama told parliament, when asked about the negative consequences of the weak yen. “The government is watching for any excessive and disorderly moves with a high sense of urgency.”
Tokyo’s last foray into the currency markets was in July 2024, when the yen neared 160. What’s changed since then is the new Prime Minister Sanae Takaichi refocusing attention on boosting exports via a weaker yen.
This push has economists scaling back expectations for Bank of Japan rate hikes. In January, the BOJ raised rates to a 17-year high of 0.5%. That fueled expectations that the BOJ would finally succeed in normalizing rates that have been at, or near, zero since 1999.
Then came Donald Trump’s tariffs. The fallout from the US president’s trade war on Asia’s No 2 economy has kept BOJ Governor Kazuo Ueda on hold virtually all year. The odds of a tightening move on December 19 have dwindled even further with Takaichi’s arrival as Japanese leader.
That has traders thinking a drop past 160 is inevitable. Particularly as the Federal Reserve throttles back rate cuts as the US economy holds its ground despite Trump’s mercantilist shock therapy.
Count the ways a weaker yen might backfire on Tokyo. It might see Japan importing increased inflation at the moment when it’s already in the neighborhood of 3%, well above the BOJ’s 2% target. It also might enrage Team Trump, drawing even bigger tariffs.
But the bigger way it might undermine Japan Inc is fueling a fresh bull market in complacency. Only now are many MOF bureaucrats and CEOs realizing that a quarter century of manipulating the yen lower has done far more harm than good.
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Sure, a weak yen boosted gross domestic product here and there. It also boosted corporate profits. But mostly it deadened the urgency for lawmakers to level playing fields and increase competitiveness. It took pressure off corporate CEOs to innovate, restructure, disrupt and boost productivity.
As the International Monetary Fund points out, “Japan’s total factor productivity growth has been slowing for a decade and has fallen further behind the United States. A steady decline in allocative efficiency since the early 2000s has been a drag on productivity, and likely reflects an increase in market frictions.”
What’s more, the IMF notes, “Japan’s ultra-low interest rates may have allowed low-productivity firms to survive longer than they otherwise would have, delaying necessary economic restructuring. Reforms aimed at improving labor mobility across firms would help improve Japan’s allocative efficiency and boost productivity.”
Unfortunately, Takaichi’s plan to revive Japan’s economy is more of the same. She’s a disciple of former Prime Minister Shinzo Abe, who from 2012-2020 sought to end deflation and restore Japanese growth and innovation. The so-called “Abenomics” that Takaichi is so keen to revive is the reason Japan is struggling amid the Chinese era.
Since 2015, when President Xi Jinping launched his “Made in China” initiative, Asia’s largest economy has invested significantly in artificial intelligence, robotics, biotechnology, electric vehicles, renewable energy, semiconductors, and other emerging technologies.
During that time, Japan mostly invested in mediocrity. Between the MOF intervening in currency markets and the BOJ hoarding government bonds and stocks, Tokyo spent the last decade making it acceptable for bureaucrats and corporate executives to avoid reform. Where’s Japan’s DeepSeek AI sensation? Or its BYD, taking the EV market by storm?
In September, real Japanese wages fell for the ninth consecutive month as inflation outpaced nominal pay. This wage-price gap problem complicates the BOJ rate hike plans. Raise rates too much and the BOJ gets blamed for the recession to come. Hike borrowing costs too slowly, and this year’s inflation becomes ingrained.
That month, average nominal wage, or total cash earnings, rose 1.9% year-on-year to 297,145 yen ($1,922). That was well short of a 3.4% jump in consumer prices in the same month. It’s a stark reminder that Tokyo’s 25-year-old weak-yen strategy is blowing up on Asia’s second-biggest economy in real time, leaving the currency on a downward path.
“The scale of yen depreciation in recent years is startling,” says Robin Brooks, economist at the Brookings Institution. “The yen has fallen more in real effective terms than the Turkish lira, which long held the distinction of being the weakest currency across the major markets. Indeed, since the end of 2019 – since just before Covid hit – only one currency, the Egyptian pound, has fallen more than the yen in real terms.”
Brooks adds that “not surprisingly, the scale of this depreciation has sparked debate on its drivers and how much further it can extend.” On some level, he explains, “yen weakness stems from Japan’s very high debt, which forces the bank to cap long-term government bond yields via open-ended bond buying.”
Ultimately, Brooks concludes, “Japan is a cautionary tale about letting debt rise unchecked. Countries can use their central banks to cap government bond yields, but that just transfers weak debt dynamics into currency depreciation.”
A big question is how China might react to renewed yen weakness. China is, after all, grappling with deflation. And prospects for a Chinese economy hitting intensifying headwinds.
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China’s property crisis continues to deepen, denting business and household confidence. Deflationary pressures are mounting as local government finances deteriorate. Youth unemployment is at record highs.
Nothing would add an economic tailwind to the mix faster than a weaker Chinese exchange rate. The yen’s drop, a dynamic that’s drawing little outrage from the West so far, could give Xi the cover he believes he needs to drive the yuan lower.
Such a gambit would indeed shoulder-check world markets and quickly become a geopolitical flashpoint. This race to the bottom could provoke other Asian nations, too. Korea, the region’s No 4 economy, could use a pick-me-up via a weaker won. Singapore could use a similar exchange-rate-driven boost as domestic demand struggles.
The Southeast Asian economies at the center of the 1997-1998 financial crisis are also looking on warily. Neither Indonesia nor Thailand would be able to sit by if Beijing followed Tokyo’s lead on exchange rates. And, of course, the Trump White House is watching.
So are the bond markets. Carlos Casanova, economist at Union Bancaire Privée, notes that Takaichi’s “expansionary policies may also encounter challenges from cost-push inflation and rising Japanese government bond yields, which could constrain her ability to issue debt — thereby reducing the likelihood of a Liz Truss moment.”
Another worry: a continued drop would trigger intense yen volatility and the unwinding of the so-called “yen-carry trade.” Twenty-five years of holding rates at, or near, zero turned Japan into the globe’s top creditor nation.
For decades, investment funds borrowed cheaply in yen to bet on higher-yielding assets around the globe. As such, sudden yen moves slam markets virtually everywhere. It became one of the globe’s most crowded trades, one uniquely prone to sharp correction.
Between erratic US policy and the specter of a fresh borrowing binge in Japan, investors have many financial risks about which to be paranoid as 2025 staggers toward a close. In this context, the weak yen is good news for nobody.
_Follow William Pesek on X at @WilliamPesek_
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“Japan mostly invested in mediocrity”とは手厳しいですな。円がトルコリラよりも下がっているとはショートには嬉しいけど
https://asiatimes.com/2025/11/how-low-will-takaichis-japan-let-the-yen-go/
