Real effective rate slides to post-1973 low
The Japanese yen’s overall strength has fallen to its weakest level in more than half a century when measured against a basket of major currencies, highlighting the long-term erosion of its global purchasing power.
According to data from the Bank for International Settlements, the yen’s real effective exchange rate stood at 67.73 in January, the lowest reading since Japan shifted to a floating exchange rate system in 1973. The index measures the currency’s strength relative to trading partners, adjusted for inflation.
The yen reached its modern-era high in April 1995 at 193.95. Since then, it has declined to roughly one-third of that peak. The currency has weakened not only against the U.S. dollar and euro, but also versus regional currencies such as the Chinese yuan and Thai baht.
Economic stagnation weighs on currency
Japan’s prolonged period of subdued growth, often referred to as the “lost decades,” remains a central factor behind the yen’s structural weakness. Following the collapse of the asset bubble in the early 1990s, the country struggled with low productivity growth, weak domestic demand and deflationary pressures.
The Bank of Japan estimates that potential growth, near 1% in the mid-1990s, had fallen to the low-zero range by the late 2010s. This muted expansion led to ultra-low inflation and persistently low interest rates, which contributed to the steady decline in the currency’s inflation-adjusted strength.
Policy normalization raises new concerns
With consumer prices and wages now moving higher, the Bank of Japan has begun shifting away from ultra-accommodative monetary policy. The policy rate currently stands at 0.75%, its highest level in three decades, and officials have signaled further increases above that level.
Financial markets are increasingly pricing in rate levels of 1.5% to 1.75%. Yet questions remain over how well households and businesses can absorb tighter conditions.
Estimates by Mizuho Research & Technologies suggest that a 0.25 percentage point rate increase would raise annual debt servicing costs for households by about 18,000 yen. For businesses, the impact could be more pronounced. Across most non-financial sectors, such a hike would reduce operating profits by 0.9%, while smaller firms with capital under 10 million yen could see profits decline by 5.1%.
“Smaller companies with a high reliance on debt are more susceptible to the impact of interest rate hikes,” said Naoki Hattori, senior Japan economist at Mizuho Research & Technologies.
Structural doubts persist
Corporate bankruptcies remain historically low, with 6,030 cases recorded in 2021, the fewest in 57 years, reflecting extensive fiscal support and prolonged low borrowing costs. However, sustained rate increases could test that resilience.
Prime Minister Sanae Takaichi has pledged to boost domestic investment following her party’s decisive lower house election victory. Despite the yen’s weakness improving export competitiveness, investment momentum has remained cautious.
“The movement of companies to invest in Japan again is still slow due to doubts about growth potential,” said Daiju Aoki, chief Japan economist at UBS SuMi Trust Wealth Management.
