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Writer's pictureStone Bridge Press

Why has the yen been so cheap?

Maybe you’ve heard that travel to Japan is booming. This is thanks in no small part to the advantageous exchange rate of the US dollar to the yen, reaching exchange rates not seen since the 1980s. The result: unusually affordable travel in a country as affluent as Japan. How has this happened? At the risk of diving into topics as complex and opaque as foreign exchange, financial markets, and macroeconomics, I hope to paint a picture of how we got here and how this fits into recent historical context.



The first point to bear in mind is that the value of currencies is relative; they appreciate or depreciate against another given currency, not some standard of value, like a precious metal. So this is necessarily a two-sided story of the trajectory of two economies. The United States’ story begins with the covid shock—the dual shocks of stock market crash and economic lockdown, which throttled productive activity. The shocks were unprecedented but the turnaround, in economic terms, was just as dramatic. By 2021 the conversation was about containing inflation—something nobody would have believed when unemployment peaked around 15% in 2020—and a “soft landing” engineered by the Federal Reserve. Taking stock in 2024, the US economy has performed better than many had anticipated, in terms of GDP, unemployment, and the growth of equities, all under the pressure of interest rates at recent historical highs.


Understanding Japan’s path requires us to go back beyond the pandemic. Japan has famously battled stagnant growth since the 1990s—the so-called “lost decades”—and even deflation. These trends persisted after the acute effects of the pandemic shock abated. Thus, while central banks around the world moved to rein in inflation by constraining the supply of money, the Bank of Japan stood still, retaining a negative interest rate until March 2024, to an extent welcoming the possibility of accelerating inflation.


These divergent macroeconomic trends and interest rate environments can be credited with pulling investors toward the dollar and away from the yen, thus affecting the price. We can think of the choice as between, for example, owning US debt that offers an attractive rate of interest or Japanese debt that offer nearly zero, a factor of the respective central banks’ policy rates. And moreover, these trends are self-reinforcing: why would you exchange dollars for yen if you thought the devaluation would continue? As we’ve discussed, this dynamic was at least partly determined by the Bank of Japan—but surely they wouldn’t want to weaken their own currency? While a weak yen certainly damages the purchasing power of Japanese consumers who rely on imports, it has also accommodated a stock market boom of record proportions. That’s because Japan’s largest market cap companies are those familiar export-oriented firms—Toyota, Sony, Mitsubishi, etc.—that benefit from a weak currency. 


Japanese industrial firms are not the only beneficiaries of a weak yen. Mobile capital can also take advantage of the lower borrowing costs in Japan to make investments in American debt or equities, which have reached record highs in the post-pandemic period. But this confluence of favorable foreign exchange and bull markets can only last as long as this policy gap is maintained. On July 31, the Bank of Japan raised its target rate by a quarter of a percent. The dollar–yen exchange quickly repriced a stronger yen. The Nikkei and TOPIX, Japan’s major market indexes, slipped in response. To make matters worse, US economic growth prospects looked gloomy after unemployment saw an uptick in July. This culminated in a Japanese stock market crash, with declines exceeding the 2011 Tohoku earthquake and the 2008 financial crisis in percentage terms.



One takeaway is that, like most things, this policy gap can’t last forever. The US Federal Reserve is under more pressure to cut rates as economic indicators lag and markets slow. Whereas the Bank of Japan can only inflict so much pain on Japanese consumers. Events like these are shocking, but they might be evidence of an unwinding of the currency dynamics between the US and Japan. So if you’ve had a trip to Japan in the works, whether you’ve wanted to visit Tokyo or the old capital, maybe now is the time.


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