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• The yen's real effective exchange rate has hit a 53-year low since the collapse of the gold standard in 1973 and the shift to a floating exchange rate system. Its comprehensive purchasing power has been surpassed by the Turkish lira, which has long been affected by high inflation, making it one of the weakest currencies in terms of real purchasing power among major global economies.
• Japan's structural trade deficit continues to pressure the exchange rate, with a projected deficit of nearly 3 trillion yen by 2025. In the context of global oil price fluctuations, foreign investment banks expect the country's annual deficit to expand again to 5 trillion yen.
• Official intervention has become the core force supporting short-term exchange rates. Since the end of April, Japan's Ministry of Finance and the Bank of Japan have spent about 10 trillion yen on interventions to curb depreciation, masking the underlying logic of the difficult convergence of the US-Japan interest rate differential and the mutual constraints of fiscal and monetary policies.

Real Effective Exchange Rate Hits Historic Low

According to the latest data from the Bank for International Settlements, using 2020 as the base value of 100, the yen's real effective exchange rate has fallen to its lowest level in half a century. Robin Brooks, a researcher at the Brookings Institution, pointed out that the Turkish lira has rebounded by about 7% this year, leading to a historic crossover in the purchasing power trends of the yen and the lira. The real effective exchange rate comprehensively considers relative valuation, price changes, and trade weights. The continued decline of this indicator indicates that the yen's real purchasing power is undergoing systemic erosion. Market analysts note that the credibility of the yen as a traditional safe-haven asset is being shaken.

Structural Trade Deficit and Policy Constraints

Fundamental data shows that Japan's cross-border capital outflow has deep structural roots. Although Japan's trade deficit has narrowed from the 20 trillion yen peak in 2022, it is still expected to record a deficit of nearly 3 trillion yen by 2025. Foreign institutions such as SMBC Nikko Securities warn that if international energy prices continue to rise, Japan's current account and trade balance will come under further pressure, with the annual deficit possibly approaching 5 trillion yen again. Meanwhile, some officials in Japan's political arena advocate for an expansionary supplementary budget exceeding 3 trillion yen, creating a policy contradiction with the Bank of Japan's relatively cautious monetary policy normalization process. Jun Takeda, chief economist at Itochu Research Institute, stated that maintaining a low-interest-rate environment while pursuing aggressive fiscal policies may reduce international capital's trust in yen assets, thereby triggering the risk of capital outflow.

Traditional Export Boost Effect Fails

Changes in the macroeconomic transmission mechanism have amplified the yen's weakness. In past historical cycles, currency depreciation usually effectively enhanced the export competitiveness of domestic manufacturing. However, since most large Japanese multinational manufacturing companies have already relocated their production bases abroad, the elasticity of yen depreciation in boosting export volumes has significantly decreased. On the contrary, rising prices of imported energy and raw materials have directly translated into imported inflation, exacerbating cost pressures on domestic enterprises and residents. The Bank of Japan has been labeled as slow to act in its interest rate decisions. If the US-Japan interest rate differential cannot substantially converge, the underlying pricing logic of the yen exchange rate will be difficult to fundamentally improve.

Official Large-Scale Intervention Maintains Short-Term Exchange Rates

Currently, the yen's exchange rate against the dollar fluctuates within a specific range, largely relying on direct support from policy funds. During periods of heightened geopolitical risk in the Middle East, emerging market currencies such as the Korean won and Indonesian rupiah generally fell by 4% to 5% against the dollar, while the yen's decline against the dollar was limited to within 2%. This relatively resilient performance comes at the cost of Japan's official intervention, spending as much as 10 trillion yen since the end of April to curb depreciation. Takeshi Higashikawa, chief economist at Mizuho Research Institute, believes that short-term intervention cannot replace structural reforms. For the yen exchange rate to achieve a stable trend, it depends on whether Japan's expected inflation rate can remain stable above 2% in the long term, thereby promoting a virtuous cycle of wages and service prices. Without the cooperation of a real economic growth strategy, the yen's credibility will still face a long time window to recover.