Continuing depreciation! Japan issues "strongest warning"

According to Japan's Asahi Shimbun on the 21st, due to the continued rapid depreciation of the yen, Japanese Minister of Finance Kano Haruaki issued a "strongest warning" on this emergency situation that day, clearly mentioning the possibility of intervening in the foreign exchange market.

Recently, the yen has continued to depreciate rapidly against the dollar. In her speech on the 21st, Kano Haruaki said that the current trend of the yen against the dollar is "very one-sided and rapid," and she expressed deep concern about it. Bloomberg reported on the 21st that Kano Haruaki's remarks were the "strongest warning" since the depreciation of the yen.

By late November, 1 US dollar could already exchange for more than 156 yen. This number set a new high of nine months since February this year, and was just one step away from the depreciation peak last year. From around 147 yen at the end of September to now, the yen has fallen almost 10 points in just one and a half months. Ordinary Japanese people look at the exchange rate board with worry, and their money has been quietly shrinking.

The core reason for the yen's depreciation is actually very straightforward. The Federal Reserve currently maintains its interest rate in the range of 3.75% to 4.0%. Even American banks predict that before Powell's term ends in May 2026, the Fed will not cut rates again. In contrast, the Bank of Japan has kept its policy rate in negative territory, which is a unique operation among major economies.

With such a large interest rate differential, funds naturally flow to places with higher returns. Global investors are selling yen to exchange for dollars, causing the demand for yen to decrease, and the exchange rate continues to fall. This trend has shown no signs of reversal recently, which is also the key reason why Kano Haruaki is urgently issuing a warning.

What worries Japan even more is the impact on trade. In the first half of the 2025 fiscal year, Japan's exports to the United States directly fell by 10.2%, with car exports being even worse, dropping by 22.7%. Although the depreciation of the yen should have benefited exports, the U.S. tariff policies and domestic industrial protection have prevented Japanese companies from gaining any benefits.

Throughout the first half of the year, Japan's trade deficit reached 1.2238 trillion yen. Import volumes have been increasing, while exports have not kept up, leading to a tightening of dollar reserves, and the purchasing power of the yen naturally declined. The yen has also not escaped the fate of depreciation against the euro, with 1 euro now able to exchange for 179 yen, setting a record low since the euro's inception in 1999.

Japanese citizens have already felt the real pressure. Many Japanese goods depend on imports, and the depreciation of the yen directly increases import costs, which are ultimately passed on to consumers. The prices of bread and milk in supermarkets have increased significantly compared to last year, and the prices of imported fruits have even doubled.

Energy prices have not been idle either. The cost of importing gasoline and natural gas has increased, and household electricity bills have been rising every month. Ordinary salaried workers' wages have not increased much, but living expenses have gone up, so many people are cutting back on non-essential spending, and even the number of weekend dinners has decreased.

Companies are also having a tough time. Export companies may seem to benefit, as products become cheaper overseas, but companies that rely on imported raw materials are in trouble. The prices of raw materials such as automotive parts and electronic components have risen, squeezing corporate profits. Some small and medium-sized enterprises have already struggled, and some businesses are considering whether to raise prices.

The Japanese government has not tried to intervene in the foreign exchange market. When the yen fell to 151 in 2022, they intervened by selling dollars and buying yen, spending hundreds of billions of dollars. However, the effect did not last long, and the yen continued to depreciate. Now, there is sufficient liquidity in the dollar market, and it remains uncertain whether Japan's foreign exchange reserves can withstand the pressure.

The market's reaction to this "strongest warning" has been rather indifferent. Investors are aware that verbal warnings are ineffective; real intervention requires actual money. However, the Bank of Japan is now in a dilemma. If it raises interest rates to narrow the interest rate differential, it might drag down an already weak economy. If it does not raise interest rates, the pressure of yen depreciation will not subside.

Recent statements from Bank of Japan Governor Haruhiko Kuroda have also been cautious, without giving any signals of adjusting interest rates. This has made the market more certain that the interest rate differential between the U.S. and Japan will not narrow in the short term, and the trend of yen depreciation may continue.

Kano Haruaki's warning seems more like a helpless statement. She is well aware that verbal warnings alone are unlikely to reverse market trends, but she cannot afford to let the yen continue to depreciate. At present, the entire market is watching Japan, wondering whether they will really take action to intervene.

But even if they do intervene, as long as the interest rate differential between the U.S. and Japan is not reduced and the trade deficit is not improved, the fundamental issue of yen depreciation will still remain unsolved. Japan's economy is already facing challenges such as an aging population and insufficient domestic demand, and now it is also dealing with the pressure of yen depreciation. The subsequent challenges will only become greater.

Ordinary Japanese citizens are most concerned about whether the yen will stop falling after this warning. They don't want to see their money continue to shrink, nor do they want living costs to keep rising. But according to the current situation, the Japanese government still has a long way to go to solve the problem of the yen's depreciation.

Sources: Global Times

Original: www.toutiao.com/article/1849457276932172/

Statement: This article represents the views of the author.