The yen's exchange rate against the dollar rose above 160 yen again less than a day after Japan's foreign exchange authorities intervened in the market. The intervention on July 30 was a nearly flawless operation, executed in coordination with the United States while market vigilance had eased. However, investors are now more focused on how long the intervention can hold.
In fact, when the yen surpassed 160 yen per dollar at the end of April, Japan's foreign exchange authorities spent approximately 11.73 trillion yen (about $105 billion) to bring the rate back below that threshold, but it soon fell back again. This suggests that the intervention is merely buying time rather than changing market trends.
The primary reason for this situation is the interest rate differential. The gap between U.S. and Japanese interest rates exceeds 2.5 percentage points, and the U.S. Federal Reserve hinted at the possibility of further rate hikes following its recent Federal Open Market Committee meeting. As long as this interest rate differential remains, the trend of yen depreciation is unlikely to change.
The problem is that yen depreciation is no longer a 'blessing' for the Japanese economy. Historically, Japan thrived as a manufacturing nation, exporting automobiles and electronics. A weaker yen would enhance the price competitiveness of Japanese products and improve corporate performance, making yen depreciation a positive factor for the economy.
However, the situation has changed. Many Japanese companies have relocated significant portions of their production overseas, meaning that a weaker yen does not automatically lead to increased exports or domestic production as it once did. Meanwhile, Japan relies heavily on imports for energy and food, causing import prices to surge due to yen depreciation. This has increased household burdens and perpetuated a vicious cycle of domestic economic contraction.
Japan is also struggling to fully benefit from the global artificial intelligence revolution. While the country has attracted TSMC and is nurturing Rapidus, declaring a 'semiconductor revival,' the leadership in advanced semiconductor production still lies with Taiwan, South Korea, and the United States, despite Japan's competitive edge in key equipment and materials. Changing the industrial structure in a short time, even with substantial subsidies, is challenging. This week, a powerful earthquake in Kumamoto, designated as a 'semiconductor hub,' has further compounded these challenges.
Another significant issue is the delay in structural reforms. Low birth rates and an aging population are reducing the labor force and dragging down potential growth rates, while national debt has soared to more than double the gross domestic product (GDP), yet fiscal spending continues to rise. This week, Japanese Prime Minister Sanae Takaiichi announced a reduction in the food consumption tax starting in April next year, despite concerns over increasing debt. In this context, the Bank of Japan is also in a position where it cannot implement rapid interest rate hikes, as doing so could simultaneously increase the government's interest burden and shock the financial markets.
Ultimately, the recent yen depreciation is not merely an exchange rate issue. It reflects a confluence of factors, including the slowdown in Japan's economic growth, changes in industrial competitiveness, demographic challenges, and the limitations of monetary policy. The Japanese government's recent downward revision of its growth forecast for this year from 1.3% to 0.9% starkly illustrates this economic dilemma. While currency intervention may temporarily slow the pace of exchange rate changes, it cannot reverse structural trends.
South Korea should not view this as merely Japan's problem. Without structural reforms to enhance future industrial competitiveness and productivity, relying solely on currency intervention or short-term measures will not safeguard either the currency or the economy, as Japan's current situation suggests.
* This article has been translated by AI.
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