Short-sellers Target Yen, Risking Repeat of 1997 Asian Crisis
Japan's declining competitiveness and currency defense strategy make the yen a tempting target for speculators, potentially triggering a wider regional crisis.
Quick Look
- Short-sellers are targeting Japan's yen, risking a repeat of the 1997 Asian financial crisis.
- Japan's weak fundamentals, high debt, and declining competitiveness make its currency vulnerable, despite large forex reserves.
- A potential inflation-devaluation spiral could profit speculators.
AI-generated summary
Why It Matters
Japan is defending its currency against the US dollar, similar to Thailand in 1996, but its weak fundamentals and high debt make this strategy risky and potentially profitable for short-sellers.
As short-sellers circle the yen, a repeat of 1997 Asian crisis looms
A Japan declining in competitiveness presents a tempting target, with short-sellers likely to also target economies like India and Indonesia
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Dr Andy Xie is a Shanghai-based independent economist specialising in China and Asia, and writes, speaks and consults on global economics and financial markets.
Published: 8:30pm, 15 Jun 2026
Japan is falling into a trap in defending its currency against the US dollar, like Thailand in 1996. Japan’s large forex reserves make the yen a juicy target, rather than deterring currency predators. Its fundamentals are weak and deteriorating, making the yen’s further decline inevitable.
Japan can’t raise interest rates aggressively to defend its currency due to its high national debt. It could fall into an inflation-devaluation spiral, greatly profiting yen short-sellers.
The yen is trading above 160 to the US dollar again, just a month after a massive government intervention. Japan’s foreign exchange reserves stand at over US$1.3 trillion but further interventions will only cost more and be less effective, allowing short-sellers to build larger positions.
Some yen short-sellers are likely to have also shorted East Asian currencies in the lead up to the 1997 Asian financial crisis. They are orders of magnitude bigger today and will need far more to satisfy their appetite. Japan fits the bill. The country has earnings from US$3.5 trillion in net foreign assets, covering it for the negative impact of a national debt twice the size of its gross domestic product, a fiscal deficit that is 4.6 per cent of its GDP and stagnant exports.
The negative case for the yen stems from Japan’s deteriorating trade account due to declining competitiveness and rising defence expenditure. Japan’s exports are likely to be entering a structural downtrend. After missing out on electrification, its most important export product, the automotive, is becoming obsolete. And US tariffs are forcing some of Japan’s export industries to relocate there, further shrinking its exports.
Meanwhile, Japan’s imports are rising. As the crisis in the Middle East drags on, Japan is being forced into liquefied natural gas and oil contracts with the United States, possibly locking in high energy costs for a decade and beyond. Japan is also rapidly increasing its defence expenditure, much of it to buy US weapons.
09:49
Japan weighs bold era of militarisation as Tokyo races to meet defence spending goals
What to Watch
AI outlook — possibilities, not facts
Yen's further decline is inevitable.
Very likely · Short term
Short-sellers will target other East Asian currencies.
Likely · Short term
Open Questions
- Can Japan avoid an inflation-devaluation spiral?
- Will short-sellers target other East Asian currencies?
- What is the long-term impact of rising energy costs on Japan?
