Why the Yen Is So Weak and What That Means for Japan

The yen has been on a historic slide, mainly because Japan’s central bank is keeping interest rates at rock-bottom levels while the Federal Reserve and other central banks have been on a hiking cycle. The down trend persists even as the pace of inflation is now about the same in Japan as in the US. That’s partly because the Bank of Japan still thinks price growth has yet to get settled in the minds of consumers and businesses. The yen’s decline has both benefited and harmed the economy, businesses and consumers. Policymakers remain on guard to see if they need to curb its decline through currency intervention as they did in 2022.

The yen has been the worst performer this year among major currencies against the US dollar, falling about 11%. That’s mainly because Japanese interest rates remain low to nurture inflation while the US and others have hiked them to cool price growth, making dollar-denominated assets more attractive for investors. The BOJ loosened its grip on Japan’s 10-year government bond yields, but it keeps rates low to support the economy, which has contracted in the quarter through September. Yields on Treasuries remain relatively high as the Federal Reserve stands ready to hike rates more if needed to cool inflation and the economy.