The Weak Yen: A Double-Edged Sword for Japan’s Economy
For decades, Japan embraced the notion that a weak yen was a blessing for its economy. The idea was simple: a weaker currency makes exports cheaper and more competitive on the global market, boosting corporate profits and, in turn, the economy. This theory seemed to hold true in 2023 when the yen plummeted to a 37-year low against the dollar. Giant corporations like Toyota Motor reported record-breaking profits, and the stock market soared to unprecedented heights. However, beneath these headlines, a more nuanced story unfolded. For the average Japanese household, the weakened yen has brought little more than higher prices for everyday essentials like food, electricity, and gas. The promised economic boom has largely bypassed consumers, leaving many struggling to make ends meet.
The Paradox of a Weak Yen: Corporate Gains vs. Household Pain
While Japan’s economy showed signs of recovery in the second half of 2024, the overall growth rate for the year slowed to just 0.1% after adjusting for inflation—down from 1.5% the previous year. This muted growth reflects the uneven impact of the weak yen. On one hand, export-focused companies have reaped the benefits of a cheaper currency, selling their goods more affordably abroad. On the other hand, households are bearing the brunt of rising import costs, which have driven up inflation. For consumers like Masumi Inoue, a single mother working in Tokyo, the weakened yen has meant stretching a already tight budget to cover basics like bread, vegetables, and school lunches for her daughter. Her story is far from unique. A December 2024 survey revealed that 60% of households felt their financial situation had worsened over the past year, while only 4% reported improvement.
A Shifting Economic Landscape: Japan’s Changing Dependence
Japan’s love affair with a weak yen was rooted in its historical reliance on exports. For decades, the country’s economy thrived on manufacturing and selling goods abroad. However, over the past 20 years, this dynamic has shifted. Many Japanese companies have moved production and sales operations overseas, reducing their dependence on the domestic economy. At the same time, Japan has become increasingly reliant on imports, particularly for energy. Following the 2011 Fukushima nuclear disaster, the country shuttered most of its nuclear plants, leading to a surge in imports of coal and gas to meet its energy needs. Today, imports account for roughly 90% of Japan’s energy supply. Additionally, Japan spends more on imported agricultural products than it produces domestically. This has left the country uniquely vulnerable to the inflationary pressures of a weak yen.
The Limits of Currency Manipulation: Lessons for Policy Makers
The situation in Japan serves as a cautionary tale for countries considering currency depreciation as an economic strategy. While a weaker currency can stimulate exports, it also puts pressure on consumer purchasing power by driving up the cost of imported goods. Japan’s experience highlights the importance of balancing export growth with domestic economic stability. Economist Richard Katz sums it up: “In economics, everything has a benefit and a cost. The question is which outweighs the other.” For Japan, the costs of a weak yen—higher inflation and stagnating wages—have outweighed the benefits for most households. Policymakers are now under growing pressure to reverse the yen’s decline, particularly with upper house elections looming in July 2025. But how?
The Role of the Bank of Japan: Navigating a Complex Inflation Landscape
The Bank of Japan (BOJ) has been at the center of efforts to stabilize the economy. For years, the central bank kept interest rates at or below zero to encourage inflation after decades of stagnant prices. However, this policy inadvertently weakened the yen, as investors sought higher returns in other currencies. Over the past year, the BOJ has cautiously raised interest rates, strengthening the yen and easing import costs. Yet wage growth has failed to keep pace with inflation, leaving many households feeling squeezed. Some economists argue that the BOJ should shift its focus from fighting deflation to supporting domestic consumption by raising rates more aggressively. This approach, they say, would further strengthen the yen, reduce import prices, and alleviate some of the burden on consumers. Others, however, warn that higher rates could harm the still-fragile economy.
The Human Cost of Economic Policy: A Closer Look at Consumer Struggles
For many Japanese households, the impact of the weak yen is deeply personal. Masumi Inoue, the single mother in Tokyo, has had to make tough choices to balance her budget. She stopped eating out for lunch and now relies on a nonprofit organization to provide free after-school dinners for her daughter. Her story underscores the human cost of rising inflation and stagnant wages. While corporate profits have soared, these gains have not trickled down to workers. Wage growth in Japan has lagged behind inflation for much of the past three years, leaving many families with less disposable income. This disconnect has fueled public dissatisfaction and raised questions about the effectiveness of current economic policies. As Japan looks to the future, one thing is clear: restoring the balance between export growth and domestic stability will require careful consideration of both the benefits and costs of a weak yen. The lessons learned from this experience could have far-reaching implications—not just for Japan, but for other countries grappling with similar economic challenges.
