Japan’s yen has been on a bit of a rollercoaster ride lately, and it’s causing quite a stir. The yen recently spiked against the dollar, leading to speculation that Japanese authorities might have stepped in to support their currency. But despite this, the underlying issue—the interest rate gap between Japan and the U.S.—hasn’t changed.
A weak yen is a double-edged sword for Japan. On one hand, it can make Japanese exports cheaper and boost corporate profits. On the other hand, it can hurt consumers by making imports more expensive, which is a big deal since 80% of Japan’s imports are priced in foreign currencies. This means that everyday people could feel the pinch, even as the country tries to recover from years of economic stagnation.
Japan has been working hard to increase wages, with this year’s spring wage negotiations resulting in a 5.1% average increase—the highest in 33 years! But here’s the catch: inflation has outpaced these wage gains. In fact, real wages (adjusted for inflation) have fallen for 26 straight months, a record streak.
Authorities are worried that if the yen continues to weaken, the recent wage increases won’t be enough to keep up with rising costs. For example, if the yen falls past 170 to the dollar, real wages might not see positive growth until the first half of 2025.
Even some businesses are feeling the strain. A food industry company in southwestern Japan mentioned that the weak yen is driving up costs so much that they might have to cut summer bonuses. And while large manufacturers might see a boost in employee income from a weaker yen, smaller companies and those in the services sector could actually see a decrease.
Most businesses surveyed prefer an exchange rate between 110 and 135 yen to the dollar. If the yen falls too much, they fear they won’t be able to pass on the increased costs to their customers, hurting profitability.
In short, while a weaker yen has its benefits, it also brings significant risks and challenges, especially for the average worker and smaller businesses. The Japanese government and Bank of Japan are walking a tightrope, trying to balance the pros and cons of a volatile currency.
