For decades in Japan it has been accepted as the gospel. Weak currencies make businesses more competitive and strengthen their economy.
Last year, some of that promise came to fruition. Big brands like Toyota Motor reported the best profits in Japanese history as the yen fell to a 37-year low against the dollar. Stocks rose high and hit highs.
However, for most Japanese households, the weakening of the yen has not only increased the costs of basic living expenses such as food and electricity. Figures released Monday showed that Japan's economy picked up in the second half of 2024, but the full year inflation-adjusted growth slowed to 0.1%. That was down from 1.5% the previous year.
Trying to stimulate exports by weakening currencies has long been a policy tool for countries seeking economic growth. President Trump said he wants weaker dollars to help America manufacture. Japan provides examples of what happens when depreciation currency crushes consumer purchasing power by exacerbating inflation, even if it helps exports.
“In economics, they tell us that everything has profits and costs. It's about asking which is bigger,” said Richard Katz, an economist with a focus on Japan. The 153 deals for $153 “this is clearly not how we run the railroad,” Katz said. “It's good to be taking lessons now.”
Figures released Monday show household spending has shrunk slightly in 2024 after expanding over the past three years. Unlike the US, strong consumption helped the economy surge after the COVID-19 pandemic.
The growing public dissatisfaction with inflation has been announced in July, as tariffs Trump has vowed to impose broadly on American trading partners, including Japan, are expected to further strengthen the dollar against the yen. It is putting pressure on Japanese lawmakers facing elections. Find a way to reverse the circle slide.
In the past, Japan has welcomed mostly weak yen, as its economy was heavily dependent on exports. However, over the past 20 years, Japanese companies have delegated more production and sales to overseas subsidiaries.
Over the same period, Japan has become dependent on imports, such as fuels such as gases used to produce coal and electricity. Since Japan closed most of its nuclear power plants following the 2011 Fukushima disaster, imports have accounted for around 90% of its total energy supply. Furthermore, we spend more on imported agricultural products than on domestic production.
The weaker currencies can help stimulate the economy when companies use the money they earn from exports to increase employment and salaries and invest in domestic capabilities, Katz said. “In Japan, you don't see any of those trickle towns,” he said. “On the contrary, consumers are simply being squeezed by rising import costs.”
Inflation means people like single mothers working for Tokyo's brokerage companies have to pay more for the basics. She feels she is burdened with everything from bread and vegetables to the rice she uses for her 5-year-old daughter's school lunch.
Inouye began to try and reduce it. She recently stopped going out for lunch and began sending her daughter to Lion Heart, a nonprofit in Tokyo suburbs, east. “It helps me eat a few times a week,” Inoue said. The rising costs are “very tough for our family's finances.”
Many others in Japan seem to share Inoue's feelings. A December survey found that 60% of households said their economic situation was worse than a year ago, but only 4% said their conditions had improved. Consumer confidence levels are far below where they were before the pandemic.
The growing public's dissatisfaction with inflation is to find a way to reverse the slide of the yen for Japanese officials. Last year, Japan intervened billions of dollars in the foreign exchange market to support the yen. But the currency is still weak and still spends weak expenses, prompting new debates about what actions the country's central bank should take.
The yen slides over the past three years have been largely spurred by the Bank of Japan's long-standing policy of keeping interest rates below zero. The goal was to encourage inflation after decades of prices, but Japan's low interest rates have also led investors to weaken the yen, hoping for higher returns elsewhere.
Over the past year, Japanese central banks have been cautious about increasing rates, which has resulted in strengthening the yen. Consumers were able to absorb the blow from inflation driven by weak yen, as companies that earned more from exchange rates offered higher wages, the central bank reasoned.
However, as wage increases have not been able to accommodate inflation for the majority of the past three years, some economists argue that the Bank of Japan should move away from focusing on overcoming deflation. Instead, they say they should focus directly on promoting domestic consumption – to raise interest rates more aggressively, strengthen the yen, and lower import prices.
In July, the Bank of Japan collided with the market, and the yen was rapidly gaining high praise due to an increase in surprise rates. The move has led to a massive sale of stocks in companies that benefit from the weak yen. The Bank of Japan is proceeding with caution after facing strong criticism. Last month, the plan was broadcast widely before raising the fees again.
Sayuri Shirai, an economics professor at Kaio University, said the rebound in the bank's July price movement sent the wrong message at a key moment. “BOJ was actually very successful in terms of valuing the yen,” she said. “In the end, what is the halt of the top priority, stock prices, or yen depreciation? At this point, I think that's clear.”
