The weak yen is becoming Japan's new normal

Ha Hyun-ock

The author is an editorial writer at the JoongAng Ilbo.

For decades, the Japanese yen was regarded as one of the world's safest currencies. During periods of financial turmoil, investors typically sought refuge in the yen, expecting Japan's stable institutions and large external assets to protect its value. That assumption is now being tested. As the yen sinks to levels not seen since the mid-1980s, the debate is no longer about whether the currency is temporarily weak. The more pressing question is whether Japan has entered an era of structurally persistent yen depreciation.

The recent slide has been remarkable. At the end of June, the dollar traded above 162 yen in New York, the weakest level for the Japanese currency since 1986. The comparison inevitably recalls the years surrounding the 1985 Plaza Accord, when coordinated intervention by the United States and its major trading partners dramatically strengthened the yen. Yet today's circumstances differ fundamentally from those of four decades ago. The forces pushing the currency lower are rooted less in exchange-rate policy than in deep changes within Japan's own economy.

The Japan of the 1980s depended heavily on manufactured exports. A stronger yen threatened exporters, prompting aggressive monetary easing that eventually contributed to the country's asset bubble. When that bubble burst in the early 1990s, Japan entered decades of sluggish growth, low inflation and exceptionally low interest rates. Despite prolonged economic weakness, however, the yen maintained its reputation as a safe-haven asset.

That reputation has gradually eroded. Since 2022, the yen has lost more than 30 percent of its value against the U.S. dollar. Measures of the currency's real purchasing power have fallen sharply over the past three decades, suggesting that the yen buys far less than it once did even after adjusting for inflation. Investors who once viewed the currency as a reliable store of value have become increasingly cautious.

Structural changes help explain why. Japan today earns enormous income from overseas investments rather than merchandise exports alone. The country continues to post substantial current account surpluses even when its trade balance slips into deficit because profits, dividends and interest earned abroad remain strong. Yet a growing share of those earnings is reinvested overseas instead of returning home, reducing demand for the yen. A country can remain wealthy while its currency weakens if much of its wealth stays outside its borders.

Energy dependence has added another layer of pressure. Japan imports most of its fossil fuels, leaving the economy vulnerable whenever crude oil prices rise. Higher energy costs increase demand for dollars to pay overseas suppliers, putting additional downward pressure on the yen. Geopolitical tensions in the Middle East have therefore become an important variable in the currency market as well as the energy market.

Domestic structural challenges are equally significant. An aging society has reduced household savings, labor-force growth remains limited and productivity gains have been modest in many sectors. At the same time, foreign ownership of Japanese equities has risen steadily over the past decade. When overseas investors realize profits, they often convert proceeds into dollars, creating another source of selling pressure on the yen.

Japan's fiscal position also complicates the picture. Public debt remains the highest among advanced economies relative to gross domestic product, and debt-servicing costs consume an increasingly large share of the national budget. The government continues to pursue ambitious industrial policies, including massive long-term investment plans in AI and semiconductors. Those initiatives may strengthen future competitiveness, but they also raise questions about fiscal sustainability at a time when borrowing costs are gradually rising.

Monetary policy offers only limited relief. Although the Bank of Japan has begun moving away from the ultraloose policies that defined much of the past three decades, interest rates remain well below those of the United States and many other advanced economies. That gap encourages investors to borrow cheaply in yen and invest in higher-yielding assets elsewhere, reviving the carry trade that has long weighed on the currency. Expectations that the U.S. Federal Reserve could maintain relatively high interest rates only reinforce that dynamic.

Market attention has therefore shifted from short-term fluctuations to long-term scenarios. Some analysts believe the yen could weaken toward 180 per dollar if current trends persist. More pessimistic forecasts even mention 200 yen to the dollar, though such an outcome would likely require several unfavorable developments to occur simultaneously, including higher U.S. interest rates, another surge in oil prices, heightened geopolitical instability and continued reluctance by the Bank of Japan to tighten policy more aggressively.

Japanese authorities have not remained idle. They have repeatedly intervened in foreign exchange markets to slow the yen's decline, spending tens of billions of dollars in the process. Intervention, however, can buy time rather than reverse economic fundamentals. If markets conclude that official action cannot alter the underlying trajectory, the effectiveness of future intervention will inevitably diminish.

Whether the yen eventually reaches 180 or even 200 per dollar is less important than what the debate itself reveals. Investors are increasingly questioning assumptions that once seemed unshakable. A currency that symbolized stability for generations is now confronting doubts about its long-term role. For Japan, the challenge extends beyond defending an exchange rate. It is about restoring confidence that its economy can generate stronger productivity, healthier public finances and sustainable growth. Without that confidence, today's weak yen may prove not to be an anomaly but the country's new normal.