Tourists cheer, the Japanese middle class groans: the yen falls to its weakest level in 40 years. However, a joint intervention with the USA has had no effect. The causes of the current crisis go back decades.
Japan is becoming increasingly cheaper for foreign tourists due to the weak yen. While Japan was always considered an extremely expensive travel destination, hotel stays and restaurant meals are now extremely affordable - especially for people with euro incomes. In the last five years alone, the yen has lost a third of its value against the euro.
Conversely, everyday life has become incredibly more expensive, especially for the Japanese middle class. And the weak yen also has negative effects for companies that have to import products from abroad. Because the costs of imports have increased significantly due to the exchange rate.
Almost two weeks ago, Japan intervened in the foreign exchange market together with the USA for the first time in decades to support the historically weak yen. The Japanese currency had temporarily fallen to its weakest level against the US dollar in around 40 years. But the intervention only led to a short respite: although the yen actually appreciated somewhat, the effect has already largely dissipated. But why was the currency of the fourth largest economy in the world able to collapse so sharply?
Japan is initially maintaining its low interest rate policy
In fact, a cheap Japanese currency was politically wanted by Tokyo at times. Former Prime Minister Shinzō Abe, who was assassinated in 2022, even made extremely loose monetary policy the core of his economic course. Japan's gross domestic product had previously been virtually stagnant since the 1990s, and the economy suffered from deflation and an aging society. Prime Minister Abe wanted to bring momentum back into the rigid economic cycle with zero interest rates and loose lending. A weak yen was desirable in that it made Japanese exports more attractive in international markets.
But the strategy only partially worked. Although Japan's exports increased significantly in the following years, the population's real wages did not grow at the same pace. The hoped-for GDP growth also largely failed to materialize.
About five years ago the situation became even more serious. The cause was interest rate policy in nature: While the US Federal Reserve Bank raised its interest rates significantly in rapid succession in order to combat stubborn inflation in the United States, Japan initially maintained its low interest rate policy unchanged. The widening gap between zero interest rates in Japan and high interest rates in the USA made it increasingly attractive for international investors to borrow yen at favorable terms and use it to buy dollars, which in turn paid relatively high interest rates. In business circles, this lucrative foreign exchange trading is also called “carry trade”.
To understand the structural background of the weak yen, one must take a look at the country's history. Even back then, the value of the Japanese currency played a crucial role.
After the end of the Second World War, Japan experienced a rapid boom, similar to Germany during the economic miracle years. The country had a massive need to catch up on investment, but was able to benefit from a well-educated population. Driven by a comprehensive industrial policy, rapidly increasing productivity and comparatively low labor costs, Japanese exports conquered world markets.
USA criticizes Tokyo's huge trade surpluses as unfair
But the USA in particular, which saw the rising Japan as a threat to its own technological leadership, criticized Tokyo's huge trade surpluses as unfair. Washington accused the Japanese government of keeping the yen artificially low to make exports more competitive. The USA's criticism of Japan is in principle similar to the accusations that have been made against the People's Republic of China for several years.
In 1985, pressure from the Americans led to the so-called Plaza Agreement among the leading industrial nations at the time: they agreed to devalue the dollar against the yen - and, incidentally, also the German mark.
More than 40 years later, the yen-dollar exchange rate is causing concern again. The negative consequences of the weak currency now outweigh the negative consequences for the Japanese economy. Theoretically, there would be a simple way to strengthen the yen: the Japanese central bank would have to raise its key interest rate again. And she actually made a turnaround this summer at the latest. The key interest rate is currently one percent, the highest level in over 30 years.
But the central bank must proceed cautiously. If it raises the key interest rate too quickly, this would probably trigger a massive wave of bankruptcies among small and medium-sized companies. Many of them are currently dependent on cheap loans that they would no longer be able to service if interest rates were higher.
Japan's debt ratio is among the highest in the world
It is difficult for Japan to stimulate the economy sustainably. The country is suffering from a rapid aging society, which ultimately leads to the proportion of the working population becoming ever smaller. The state is also indebted to the extent of well over 200 percent of its gross domestic product - one of the highest debt ratios in the world. For comparison: Germany's debt amounts to around 65 percent of its gross domestic product.
The Wall Street Journal was not surprised that currency interventions only have a short-term effect in this environment. In a commentary published earlier this month, the renowned US financial newspaper offered some concrete advice: "A better plan to save the yen would include reduced government spending and renewed reforms to boost economic growth - making Japan a more attractive place to invest."
