The precipitous fall of the Japanese yen

Japan's economy has not had a good 2024, to say the least. It entered a short recession in February and now is dealing with a crisis surrounding the nation's currency, the yen. The currency's exchange rate has been seeing a continuous slide, recently weakening to 160.86 against the U.S. dollar and 171.79 against the euro. This marks the yen's lowest value against the dollar since 1986, and its lowest value against the euro ever. 

This unprecedented low values had some wondering how other nations would react to the ongoing issues within Japan's economy — specifically whether or not foreign markets would intervene in an attempt to stop the slide. How did Japan's currency get here, and why are many industry experts blaming the United States? 

Why is the yen losing value?

There are several factors, but it is mainly a "product of divergent monetary policy between the Bank of Japan and its developed-market peers — particularly the Federal Reserve," said Barron's. This is the result of a wide difference in interest rates between the U.S. and Japan; the Bank of Japan "has only just begun to ease off intense monetary stimulus, while the Fed and other central banks are years into tightening cycles."

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The Bank of Japan has attempted to "normalize monetary policy" by "lifting its benchmark interest rate out of negative territory," said Barron's. But these efforts have been "dwarfed by the Fed's interest-rate hikes starting in 2022," and this "wide gap sets up a popular so-called carry trade for Japanese investors and institutions that puts pressure on the yen."

This interest rate gap "reflects the very different inflation environments in the U.S. and Japan," said Al Jazeera. Japan has "struggled to get prices and wages to rise after decades of economic stagnation" while the U.S. "has been battling to bring prices down amid robust economic growth." This has made Japan one of few countries that has "maintained rock-bottom borrowing costs in an effort to shake the economy out of a prolonged stagnation known as 'the lost decades.'" But the trend is not entirely new; The currency "has been on a continual slide since early 2021" and "over the last three years, the yen has lost more than one-third of its value."

How can the yen be saved? 

The "grim reality" is that the "slide won't stop until the Federal Reserve relents on its higher-for-longer policy path. And [Japanese officials] have no control over that," said Bloomberg. Beyond this, all "efforts by officials in Tokyo to prop up the yen so far have fallen flat."

Japan has said it will take the required actions to stop the yen's bleeding. It is "desirable for exchange rates to move stably. Rapid, one-sided moves are undesirable. In particular, we're deeply concerned about the effect on the economy," Japanese Finance Minister Shunichi Suzuki said, per Reuters. The government is "watching moves with a high sense of urgency, analyzing the factors behind the moves, and will take necessary actions." 

But there are doubts as to whether any actions "can reverse the weak-yen tide that is driven mostly by uncertainty over how soon the U.S. Federal Reserve will start cutting interest rates," said Reuters. While the Bank of Japan has signaled that it will likely raise interest rates, an "increase in the current near-zero short-term policy target will still keep Japan's borrowing costs very low," meaning the yen would remain mostly stagnant. 

And any small rate hikes are "unlikely to satisfy the market and intervention now is pretty much the only option for Japan to slow down the weakening," Tsuyoshi Ueno, an economist at NLI Research Institute, said to The Japan Times. But not all the news is bad. If inflation continues falling in the United States, it "could very quickly change the outlook for the interest rate gap between the dollar and the yen, and the Japanese currency could make a dramatic comeback," said the outlet.