Why the Japanese Yen is Becoming Stronger

Why the Japanese Yen is Becoming Stronger

Over the past few years, the Japanese yen has 
slid in value against many major currencies.   One of them is no other than the U.S. Dollar. If 
we were to graph out the official exchange rate   of the yen to the U.S. Dollar, we get to see that 
the yen had slid in value dramatically. In 2019,   prior to the Covid-19 pandemic the Japanese yen 
was trading at 109 to a dollar, but in 2023,   the yen had been devalued massively to 
over 140 yen to a dollar. Some months   in the year 2024 also saw the yen trade at 
160 to a dollar. This value wasn’t seen for   a very long time. If we were to extend 
the graph and include previous decades,   we get to see that the yen hasn’t 
been this undervalued since the 1980s. This, as many analysts have said, has 
been a significant contributor to the   increase in Japan’s exports, and tourism 
sector. For instance, if we were to graph   out the export growth year over year of 
Japan, we would see that the country’s   exports have been growing. In some months 
of 2024, Japan’s exports had grown by more   than 10%. This is partly because of the weak 
yen, which helped boost the competitiveness   of Japanese products in international markets. 
A weaker yen, after all, helps make the cost   of Japanese goods and services cheaper for 
foreign buyers, thereby increasing demand. On top of that, if we were to graph out the 
number of foreign tourists arriving in Japan,   we get to see how much it increased for the year 
2024. This is again a reflection of the weak yen,   which has made Japan a much more affordable 
destination for international travelers. The   combination of lower costs for accommodation, 
food, and shopping—compared to other major   tourist destinations—has led 
to a surge in visitor numbers. But at the same time, the weak yen has 
also caused Japan’s import costs to surge,   particularly for essential goods like energy, 
food, and raw materials. This has led to lation,   affecting both businesses and households. 
Since Japan relies heavily on imports for   its energy needs, the depreciation of 
the yen has drastically increased the   cost of fuel and electricity, placing a 
burden on consumers and industries alike. But the weak yen which caused significant changes 
to the Japanese economy over the past few years   may finally change. The yen may finally go back 
to a stronger position. If we were to graph out   the yen’s exchange rate to the U.S. Dollar, 
we get to see that since the middle of 2024,   the yen has been appreciating in value. 
You can see that, despite the yen trading   still at high 140s, it shows a trend of 
going back to a stronger value. Of course,   a lot of reasons can still be made as to why 
it may stay in this value for a longer time.   But there’s an argument as to why the 
yen may actually appreciate in value. To understand why that is,   we must first understand what caused the 
yen to depreciate in value to begin with. During the Covid-19 pandemic, many 
economies around the world had faced   significant contraction. Japan is no outlier in 
this situation. The economy of Japan contracted   by over 4.1%, which was the biggest contraction 
seen since the 2008 global financial crisis. The   result of this contraction was combated by fiscal 
and monetary stimulus. Japan, the United States,   the European region, and probably all other 
nations globally have launched fiscal stimulus. Fiscal stimulus, in case you’re 
not aware of what that means,   is basically the use of government spending and 
tax policies to stimulate economic growth. When   a government implements fiscal stimulus, 
it increases spending on infrastructure,   social programs, or direct cash support to 
households and businesses. Monetary stimulus,   on the other hand, happens when the central 
bank, for instance, the Bank of Japan,   has lowered the interest rates, printed money 
or bought up government bonds of the country.   This would also help push economic growth, as it 
encourages spending, borrowing and investment. But as many of you know, the result of 
this was significant inflation. Inflation   was seen. It was seen in the United States, 
Europe and many countries around the world.   Japan was no exception to this matter. If we 
were to graph out the inflation rate of Japan,   we would see that Japan’s inflation 
had increased substantially. This is a   substantial increase because Japan didn’t really 
see inflation at all in its country. In fact,   it experienced deflation, which had been one of 
its defining economic challenges for decades. To combat the inflation, the governments 
globally had to take action through various   monetary and fiscal policies. Central banks, 
including the Federal Reserve in the United   States, the European Central Bank, and others, 
aggressively raised interest rates to slow down   inflation. However, the Bank of Japan had 
taken quite a different approach. Instead of   raising interest rates to combat inflation, the 
Bank of Japan had actually kept their interest   rates low. This is because, for a long time, 
Japan didn’t really see inflation. For them,   this inflation rate was more of a new economic 
phenomenon rather than a recurring challenge.   Unlike the United States and Europe, where 
inflation had been a persistent issue,   Japan had spent decades grappling with deflation—a 
scenario where prices stagnate or even decline.   Because of this, the Bank of Japan was hesitant 
to react aggressively to rising inflation,   fearing that premature tightening of 
monetary policy could stifle economic growth. The result of this no-change in interest rate, 
whilst many other economies globally had been   hiking up interest rates, is the devaluation of 
the yen. This is because investors moved their   money to countries with higher interest rates, 
like the U.S. and Europe, where they could earn   better returns. Since Japan kept its interest 
rates low, the yen became less attractive,   causing it to lose value against major 
currencies like the U.S. dollar and euro. That is in simpler explanation the cause for the 
yen’s decline in value. But this same principle is   what is going to cause Japan’s yen to become 
stronger – when they increase the country’s   interest rate. If we were to pull up the interest 
rate graph again, we would see that in the past   few months, the Bank of Japan had actually 
been hiking up interest rates. In contrast,   if we were to compare it to the Federal 
Reserve, they have been lowering interest rates. The shift in the two central banks means that 
the yen has a chance to regain its strength after   years of depreciation. With the Bank of Japan 
raising interest rates and the U.S. Federal   Reserve lowering them, the interest 
rate gap between the two countries is   narrowing. This makes the yen more attractive to 
investors, leading to an increase in its value. So, you can clearly see why the 
yen is going to become stronger,   and it’s all because of the change 
in interest rates. But to begin with,   why is the Bank of Japan changing its stance after 
years of keeping interest rates low? The answer   again as we mentioned earlier lies in inflation. 
If we were to check the data on the interest   rate of Japan by month as of the latest months 
available, we get to see that Japan’s inflation   rate has reached a height where the Bank of Japan 
may need to increase interest rate. For instance,   in January of 2025, the inflation rate of 
Japan had been over 4%. That’s a very high   figure. The Bank of Japan had long aimed for 
a 2% inflation target, believing that moderate   inflation would help stimulate economic growth 
and avoid deflation. However, when inflation   exceeded 4% in January 2025, it became clear 
that the BOJ could no longer delay action. If they were to leave the interest rate as 
it is, then inflation would continue to rise,   putting more pressure on households and 
businesses. The weak yen would also persist,   keeping imported goods expensive and making 
everyday necessities like food, fuel,   and electronics costlier. In short, doing 
nothing would mean Japan remains trapped   in an inflationary cycle, where wages 
struggle to keep up with rising prices. And that is also another major reason 
why the Bank of Japan had to increase   the interest rate. Not just to combat inflation, 
but because wage growth hasn’t been keeping up. If we were to graph out the real earnings 
including bonuses of Japan, we actually get to   see that it isn’t rising. It’s mostly negative at 
most months, with only a number of months showing   positive. This data basically shows that Japanese 
workers are losing purchasing power. Even if wages   are increasing in nominal terms, inflation is 
rising faster, making real earnings decline. So, in the short-term, we may likely see the 
yen trade at this level. But in the longer-term,   the yen would eventually get back to its original 
value. But this is again still a question rather   than a confirmative scenario. The reason being 
is if Japan can actually continue to have this   inflation trend. If inflation were to decrease 
again, and the Bank of Japan were to do a u-turn,   and instead of increasing interest rates, they 
would decrease them, then it is possible that   the yen’s value could stay the same. But from 
the looks of it, the inflation rate which has   been very high as of late would likely help 
interest rates higher, and thereby appreciate   the value of the yen. But anyway, do let us 
know what you think. Thanks for watching!

Japan’s yen is bound to rise in value in the next couple of years, driven by inflation and interest rates.
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This video is based on publicly available data and research. While we aim for accuracy, interpretations are our own and should not be considered as the only perspective. Viewers are encouraged to explore the sources provided for a deeper understanding.
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