What does a weak yen mean for Japan's economy?

The Japanese yen slumped to a 34-year low. What does a weak yen mean for inflation, interest rates and tourism in Japan?

Kabukicho, Tokyo
(Image credit: DuKai photographer)

The Japanese yen has sunk to a 34-year low, trading as low as ¥160 to the dollar on Monday. Japan’s currency has shed more than a third of its value over the past three years, says Jonathan Yerushalmy in The Guardian. The Bank of Japan (BoJ) has held interest rates “extraordinarily low”, even as they rise in other countries. It finally raised them in March – the first hike in 17 years – but only to just over 0%. 

At a meeting last week, the BoJ held rates steady, signalling that it is in no rush to hike again and precipitating “another round” of yen selling. Currency traders have finally realised “that Japan is following a policy of benign neglect for the yen”, says George Saravelos of Deutsche Bank

Speculation about rapid rate hikes was an illusion. While yen weakness does increase inflationary pressure, that is still not a pressing concern in Tokyo, since a weak currency has other advantages: it is helping exporters to stay competitive and driving a tourism boom. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The yen’s new low didn’t last long, says Richard Abbey on Bloomberg. In wild trading on Monday it quickly gained 3% against the US dollar, triggering suspicions that the government had intervened to stem the bleeding. While Tokyo may not mind a steady decline, it wants to avoid a destabilising currency crash.

A weak yen helps exporters

A weak yen is good for Japan’s export-focused multinationals. The local Topix index has been one of the world’s top performers with a 15% gain this year. 

Unfortunately, the yen’s slump also eats into those gains in sterling terms, with the London-listed iShares MSCI Japan Fund up by a more modest 7% for the year to date. 

“The drip, drip, drip of weak yen news” has become “part of the Tokyo zeitgeist”, says William Pesek in Nikkei Asia. Japan’s sliding currency is discussed “on television, in newspapers” and “at bank branches”; it can also be seen in the exploding number of foreign tourists. 

The slump threatens eventually to undermine the confidence of households and foreign investors. A relentlessly weaker currency is hardly the sign of an economy roaring into recovery mode after decades of stagnation. “If Japan Inc. is primed for a boom,” then why must the country rely on an “Argentina-like currency strategy”? 

Japan’s Nikkei stock index hit a record high earlier this year, but it’s not too late to jump aboard, says Kate Marshall of Hargreaves Lansdown. “Japan’s market still looks good value compared with other global markets and its own history,” with especially appealing value among small and medium-sized firms. 

While “excitement” around corporate governance changes has cooled, the reforms have fostered a durable shift in “mindset”, with firms increasingly run in the interests of their shareholders. That should keep providing a steady tailwind for Japanese shares.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.