For years, the belief in Japan was practically sacrosanct: a weak currency boosts company competitiveness and energizes the economy. Some of this played out last year. The yen nosedived to its lowest in 37 years against the dollar, and giants like Toyota Motor enjoyed record-breaking profits. The stock market was on a jubilant high.
But the average Japanese household isn’t particularly thrilled. The devalued yen has mostly meant higher everyday costs, like groceries and electricity bills. The latest government stats show that even though Japan’s economy picked up steam in the latter half of 2024, when adjusted for inflation, growth for the entire year sagged to a meager 0.1%, down from 1.5% the previous year.
Using a weaker currency to spur exports is an age-old strategy for countries aiming for economic expansion. It’s something President Trump has pointed out, advocating for a weaker dollar to benefit American manufacturing. Yet, Japan serves as a cautionary tale—illustrating that while a cheaper currency may aid exports, it can also erode consumer purchasing power and exacerbate inflation.
“In economics, there’s always a trade-off,” says Richard Katz, an economist who focuses on Japan. Reflecting on the yen’s current rate of around 153 to the dollar, he mused, “This isn’t the most effective strategy.” Katz suggests it’s essential to glean insights from this experience.
The data released on Monday provides a stark picture: household spending has contracted slightly in 2024 after a three-year growth. Unlike the United States, where robust consumer spending helped the post-pandemic economy flourish, Japan’s lackluster spending means the real GDP has barely crept past pre-pandemic levels.
With the looming threat of tariffs President Trump has promised, the dollar might strengthen further against the yen, amplifying public unrest over rising inflation. This puts mounting pressure on Japanese lawmakers, especially with upper house elections approaching in July, to devise strategies to curb the yen’s decline.
Historically, Japan’s economy thrived on exports, making a weak yen an asset. However, in the past two decades, many Japanese companies have shifted more production and sales abroad.
Parallel to this shift, Japan’s reliance on imports has surged, particularly in energy sectors like coal and gas—essential for electricity generation since the 2011 Fukushima disaster prompted nuclear plant closures. Now, imports make up about 90% of Japan’s energy supply. Agriculture, too, sees more imported goods than domestic production.
Mr. Katz points out that if companies reinvested earnings from exports domestically through hiring or salary increases, a weaker yen could stimulate the economy. “But in Japan’s case, consumers are instead bearing the brunt of increased import costs,” he notes.
For people like Masumi Inoue, a single mother working in Tokyo, inflation means paying more for staples. The pinch from rising costs—from bread and veggies to rice for her daughter’s lunch—has her cutting back. Recently, she stopped dining out and started sending her daughter to Lion Heart, a nonprofit in eastern Tokyo offering free dinners and tutoring. “Getting those meals helps,” she says, adding that finances have been squeezed tightly by escalating prices.
This sentiment resonates with many across Japan. A survey in December found 60% of households felt worse off than the previous year, while a mere 4% reported improvements. Consumer confidence lingers below pre-pandemic levels.
Public dissatisfaction due to inflation is prompting Japanese leaders to seek solutions against the yen’s depreciation. Last year, Japan spent enormous amounts intervening in the foreign exchange market to stabilize the yen. However, the currency remains weak, consumer spending languid, sparking discussions on what the central bank should do next.
The yen’s depreciation over the past three years largely stems from the Bank of Japan’s enduring policy of maintaining zero or negative interest rates. While the intention was to trigger inflation after years of stagnant prices, low rates encouraged investors to pursue better returns elsewhere, weakening the yen.
Over the last year, Japan’s central bank has cautiously raised rates, strengthening the yen in the process. The central bank believed consumers could manage inflation spurred by a weaker yen since companies were expected to pass currency gains back through higher wages.
However, wage growth hasn’t matched inflation for much of the past three years. Some economists argue the Bank of Japan should shift focus from battling deflation to bolstering domestic consumption—suggesting more aggressive rate hikes to strengthen the yen and reduce import costs.
In July, the Bank surprised markets with a rate increase, causing the yen to appreciate rapidly and triggering a sell-off in stocks that benefited from a weaker yen. Facing backlash, the bank has been more cautious since, clearly signaling its intentions before any further rate increases.
Sayuri Shirai, an economics professor at Keio University, remarked that the criticism of the July rate hike sent the wrong message. “The central bank was effective in boosting the yen,” she observed. “At this juncture, it’s apparent what the priority should be: controlling the yen’s decline, not focusing solely on stock prices.”
