The yen is at its weakest level since 1986 what that means for you Econ World 2

Right now it takes about 162 Japanese yen to buy one US dollar. The last time it took that many yen to buy a book was 1986. Ronald Reagan was in the White House. Top Gun, the original Top Gun, was in movie theaters. Madonna was telling Papa not to preach. You get the picture, a long time ago. Now, you might think the value of the yen is irrelevant to you, unless you live in Japan or you're heading there on vacation. But that's not true. You see, the Japanese government has vast holdings of US government debt, and the yen is used by investors all around the world to invest outside of Japan. They borrow in yen, convert it to US dollars, and use it to buy higher yielding assets, a maneuver that's known as the carry trade. So when the value of the yen rises or falls sharply, that can cause ructions on financial markets, affecting your investments and your borrowing costs. So on this week's show, we want to look at why the yen has fallen so sharply and what can be done about it. We're getting into currency interventions, interest rate differentials, all that good stuff. So stick with me. I'm Carmel Crimmins, and this is Reuters Econ World. Every week, we go deep on the economic principles and ideas driving the biggest news around the world on this week's show, The Yen. So to talk me through Japan and the yen and Japanese markets, I'm joined today by Rocky Swift, who's our chief correspondent for Japan markets. Rocky, hello. How are you? Good morning. I'm very good. How are you? I think it is an afternoon there, evening there. I've caught you kind of late in your day. It's just past 4 p.m. So the stock market is closed, but the JGB market will keep going a little bit. And the yen is now doing its thing mainly for the European markets. So not quite cocktail hour. There's still some trading. It depends on... Rocky, I've got to say, you've got one of the best names in Reuters. When we think about text reporters, think about bylines. I've always seen your name in print and thought that is a great name for a journalist. I'll second probably only to Joey Roulette, who's our business of space correspondent. But I love your name. Where does it come from? Is that an abbreviation of something or a nickname? It's a little hard to live up to, but as long as I've been a journalist, it has been my byline. And my legal name is James Swift. My dad was also a James. So I think just when I was a baby and a toddler, my folks just called me, gave me this nickname just to differentiate me from my dad. And I didn't know it wasn't my name until like the fateful day my mother drives me up to kindergarten and she says, oh, by the way, so the teacher, she's probably going to call you James. And I said, why? And she said, well, that's your name. Rocky's just a nickname we gave you. So my whole little five-year-old identity is crumbling and I started crying. Crisis on the steps of kindergarten. Exactly. And so, you know, she did what parents often do. And she just said, oh, relax. We'll talk to the teacher. Maybe you can just be Jane, Rocky for the rest of your life. So and that's basically how it worked out. Well, I don't blame you for keeping the name. It's a cracking byline. So Rocky, the Japanese markets, the yen, how long have you been covering this space? I've covered a number of different beats, but I've been doing markets specifically for the last couple of years. So, yeah, I've been a participant and an observer for a long time. I was working on markets in 2011 when the yen, you know, shot down to a record high in the aftermath of the earthquake. And at that time, Japan was intervening to weaken its currency. So I've seen the currency through a lot of ups and downs. Wow. It's different times because like right now, the yen, it's at 40-year lows, kind of like 1986 was the last time the yen was this low. What's going on? Well, the yen has been in a long-term weakening trend and that accelerated a bit. You know, you have to look at 2022 with the outbreak of the war in Ukraine and that created an energy shock for Japan. Japan has to import almost all of its energy. And that kicked into another gear last fall when fiscally dovish, you know, Sanae Takahashi was elected the prime minister. And then we've seen it, you know, its latest, you know, jump in the currency pair to its current level. You know, that was kicked off by this war in Iran, which delivered Japan yet another energy shock. So just for our listeners or for viewers, so Japan is a big energy importer and for that, it needs dollars, right? So it needs to, it buys that energy using the U.S. dollar. So effectively buying dollars, selling yens, that would weaken the currency. And then in terms of the government, in terms of Takeichi, Japan's kind of sort of fiscal fundamentals, it's got a budget deficit. I mean, when you talk about her being a dove, are you talking there about monetary policy in particular, about where she would like the interest rate, the borrowing costs to be? It's a bit of both. You know, she is considered to be a protege of Shinzo Abe and the Abe-nomics reforms that he brought in, which was predicated on very big fiscal stimulus and very big monetary stimulus. Okay, so tax cuts, spending, low interest rates. Yes. And so the monetary side of that is, you know, in some ways it's out of her direct control because the central bank is independent. But, you know, in Japan, the central bank does have a mandate that it has to, you know, cooperate with the government on its economic aims. So Takeichi is believed to be a skeptic of interest rates and a believer in some of the benefits of a weak yen. So relative to maybe other regimes, she is seen as more tolerant of a weak yen. Before we get into the benefits of the weaker yen, because there are benefits from having a weak currency, when we talk about currencies, there's always two sides, right? Because when we're referring, when I'm referring to the value of the yen, when we're talking about this, we're referring to the value of the yen versus the dollar, right? So there is always that kind of push and pull of it. And I suppose the other side of the story is, is that it's the dollar and it's the US economy, isn't it? So there's the interest rate differential between the US and the Japan, which is also really driving So US rates are higher than Japanese rates. And I suppose when you compare the two economies, maybe the US economy is seen as more attractive to investors, right? It's got this booming AI story. So there's more money flowing into the US, flowing into the dollar, making it stronger versus the yen. That's also at the crux of this, isn't it? When we look at this valuation. That's right. So it kind of goes back to the central bank rates and this huge gap between where the Bank of Japan is and where the Fed is. And so even with the Bank of Japan being on a tightening cycle, trying to, in some way, unwind some of that huge monetary stimulus that went on during Abe's regime and the previous central bank governor, there's still quite a big gap in those rates. And so that provides an incentive for some investors to borrow in the yen and to invest in higher yielding regimes. And that's called the carry trade. And it's another factor in keeping the yen low relative to other currencies. And when you talk about the attractiveness of the economy, Japan, the Japanese economy is actually starting to do all right, but it's coming off of decades of deflation. And so the money is starting to come back into Japan. We see that the Nikkei is outperforming a lot of global indexes, even flowing into JGBs a bit, Japanese government bonds. But the story hasn't turned around to a degree that we're seeing that manifest in the currency yet. Is that because the U.S. story, the U.S. investment story is just so much more compelling? In a way. And so Japan, Japanese households and institutional investors are still huge net investors overseas. So the so-called Mrs. Watanabe, the household investor, when she and her household are putting money into their version of a 401k, it's called a NISA here in Japan, by and large, they're sending their money overseas. They broadly are skeptics even of their own economy. They want to put their eggs in other baskets. So there's still a lot of a net outflow from Japan into other markets, most notably the United States. So that's another factor that's sort of acting against the yen. And also when we look at the Japanese economy, I mean, you know, it's kind of its fundamentals. There's some really kind of eye-catching figures aren't there when it comes to the Japanese economy, like its balance sheet, you know, the debt levels. I think when we, you know, people think about Japan, maybe who aren't investors, they think of, oh, that's an economy where everyone saves a lot. It's, you know, to work hard, squirrel your money away. But from a government perspective, they're hugely indebted, right? The debt levels are like 200% of annual output, which is really eye-popping. I mean, even going up to 100% is considered, you know, not great for an economy, right? And then they're also, they're running a fiscal deficit. So sort of the fundamentals of the Japanese economy are also maybe perhaps not hugely encouraging for investors to put their money into. Well, yeah, those are figures that the yen bears would point to. Japan has the highest debt to GDP ratio in the developed world, although it is coming down. On the other side, you could say, well, most of that debt is held internally. And so the net debt would actually be lower. And the fiscal situation is improving. A headline we had last week was that the nation had a record amount of tax revenues last year. So there are some bright points. And what the government is hoping to do, and you see Takaichi and the finance minister talking about the debt to GDP ratio, they want to bring that down, but they want to do so by focusing on the denominator, by growing their way out of the problem, by expanding the economy, and doing so without adding too much to the overall debt. Okay, quiz time. In 1985, five countries agreed to devalue the US dollar to improve trade imbalances. The agreement was named after the luxury hotel in which it was signed. Can you tell me the name of that deal? Was it A, the Four Seasons Accord, B, the Plaza Accord, or C, the Hilton Accord? I'll have the answer for you at the end of the show. Up next, what exactly does a weaker yen mean for Japanese people and their politics? So why does all of this matter? What are the consequences of having a yen, you know, a 40-year low versus the US dollar? Well, the most direct consequences are for people in Japan, including me. I'm paid in yen, so my salary is going down, so the households are feeling it because their imported inflation is going up rather fast and faster than wages. So people here are feeling poorer, and any sort of vacations overseas are becoming more difficult, more pricey, and it affects domestic-focused businesses too. Yes, so bad for Japanese people, for Japanese consumers, and bad if you're importing anything into Japan, right? So it's making things more expensive. Great news if you're a tourist to Japan, of course, and good news if you're a Japanese exporter. True, and we have seen record tourists, inbound tourists coming into Japan, both in the numbers of people and what they're spending here. I mean, it's a great bargain. And it used to be this truism that a weak yen was good for these multinationals like Sony, Nintendo, Toyota, but even for them, the yen has weakened past the point of comfort because they still have a lot of inputs that they have to pay for. So when we do these surveys, the sweet spot for Japan Inc. for the yen might be around the 130 to 135 level. So it being at 150, 160 and higher is kind of too far for most of corporate Japan. Right, so there's kind of a cost-of-business crisis as well as a kind of a cost-of-living crisis for ordinary Japanese people. And it's having a real political impact, isn't it? We've seen that two prime ministers now have lost their jobs because they couldn't handle this or deal with this cost-of-living crisis. Well, you know, ever since COVID and again these energy shocks that we've seen over the last two years, these have been the major influences on hurting households at the pocketbook. And ultimately that has led to popularity cratering for previous prime ministers and now the election of Takaichi last fall. And sort of we're seeing sort of more extremism creep into Japanese politics as well. In some ways, I mean, around the world we have seen an uptick in sort of right-wing parties and there have been. There was one like last summer called Sanseito, which was considered to be kind of an anti-foreigner, a conservative party that got a large number of seats. But in some ways, Takaichi is to the right of her liberal democratic party. And so her landslide victory in these by-elections that happened in February took a lot of the wind out of the sails of Sanseito and other parties. I suppose the big kind of risk factor, Rocky, is the kind of potential for contagion in financial markets, from this weak yen. I mean, because of its weakness, it is used as a vehicle by investors. They borrow in yen and use the proceeds to invest in lots of other assets, US equities, US treasuries, European equities, property. It's sort of the foundational stone for a lot of investments. So when it gets weaker, that becomes unmoored. That's true. And we see in any kind of financial market that everything is connected. And Japan has been a huge funder in the US stock market. It's a huge buyer of US treasuries. I've talked to many financial managers here who invest a lot in the European market. So everything's connected. And if there's a crisis here, it's going to affect the economies and the markets in the United States and Europe and beyond. I mean, this wasn't meant to happen with the yen, Rocky, was it? I mean, Japan has come out of a long period of deflation. The Bank of Japan has slowly started raising interest rates. The trajectory was meant to be for the yen to strengthen. What happened? It's true. And I think it's taken a lot of analysts and investors by surprise that a rebound in the stock market hasn't also manifested in a rebound in the currency. And what some people say is that because Japan has kept its bond yields low for so long, this long decade plus of really aggressive monetary easing by the Bank of Japan, that it artificially kept Japan's bond yields low. So typically, if you're a skeptic of an economy, you bet against this bond market. And that's what brought down Greece, for example. But you quite literally can't. It's kind of financially impossible to bet against JGBs in the same way. So some people say that basically the yen is kind of the victim here. The yen is being shorted and sold off because that financial stress cannot be manifested in the bond market. It would just be too cataclysmic because the Japanese bond market is just too big. In a way, it's kind of a Sophie's Choice for Japan. Does it save its currency or does it save its bond market? And between the two, you kind of have to save the bond market because it is so big, because it does impact borrowing costs for the government, because so much of household savings is wrapped up in it. You can't afford for the bond market to collapse. So in a way, I think that's probably, and this is my opinion, that's probably guided the policy choices that even now with the Bank of Japan raising rates and starting to lower its domination of the bond market, that it's doing so gradually, that each rate increase is coming at every six months or so. And so that normalization is not coming fast enough to give tailwinds for the yen. If you're enjoying this show, why not check out some of Reuters' other podcasts? We've got a special one for the 2026 World Cup called Reuters Pitch Side. Check it out wherever you watch your podcasts. In the final part of the show, we look at what can be done to stop the yen's So what can be done to prop up the yen? There's really just two policy levers left to Japan at this point. And one is interest rate increases by the Bank of Japan, and the other is direct currency market intervention. And we've seen both recently, and neither has had a lasting effect in bringing the yen back down. So just break it down for us in terms of currency intervention, how does it actually work in practice? So the elected government, so the Prime Minister and her administration, they make the decision through the Ministry of Finance. The Ministry of Finance then asks the Bank of Japan as its agent to sell dollars and buy yen. And they do this in vast quantities, and that moves the dollar-yen rate lower. And it's controversial, isn't it? Because to do this, as you say, they have to sell dollars, and maybe sometimes they have to sell U.S. treasuries. So there's a direct impact on U.S. markets when Japan intervenes in its currency markets. That's right. So most of Japan's foreign assets are held in treasuries. As of the foreign reserves, you can kind of think of that as its intervention of war chest. But at a certain point, it can only sell down that war chest to a certain point before it starts to impact the U.S. treasuries market. And then that's where this kind of contagion in other markets can take place. And it's one of the reasons, isn't it, why in general governments sort of, the global financial system doesn't like currency interventions because it obviously affects other countries. So in theory, in developed countries, they're not meant to intervene in their currency markets, right? I mean, I think Japan is a participant in various different sort of financial arrangements which say we will not intervene in our currency. It's not really the done thing, even though it happens. That's right. And in particular, the U.S. treasury comes out with this kind of annual report about other currencies and whether a certain country is labeled as a currency manipulator. And it's traditionally kind of been seen as like this scarlet letter that you don't want. And it's considered to be going against market forces. But lately, this administration in the U.S. doesn't seem to be that concerned with intervention, at least by Japan. And so they seem to have lent at least moral support through statements from the treasury secretary. And implicit, there is this agreement that Japan signed with Washington last September, which was this understanding that intervention was an appropriate tool to correct excessive currency market volatility. I suppose in general, the U.S., particularly the current administration, doesn't like it when countries try and sort of keep their currency artificially low because then that makes U.S. imports to that country more expensive, right? So maybe in this case, they don't mind that the Japanese maybe would be trying to prop up their currency because it's kind of a move in the opposite direction. Indeed. And they've never come out and said it, but the Trump administration with its deeds seems to be angling for a weaker dollar, and they wouldn't mind if other currencies were stronger. And so that's why I think with at least in their public statements, they haven't come out and warned or scolded Japan or other countries for defending their currencies. When it comes to currency intervention, there's obviously the actual act of it, but ahead of time, there's talking about it, right? And sometimes, am I right that the government will use words rather than actions to try and influence where the currency is trading? Yeah, that's right. And there's almost kind of a script to this where there's kind of this escalation of rhetoric where they'll say things like, you know, currency movements are somewhat rapid. FX movements are undesirable. We're watching FX moves with a high degree of urgency. So they keep building up this rhetoric as a warning. Signaling to the markets, right? Exactly. And so in the past, that has been somewhat successful and tamping down and putting kind of a lid on the currency. And then the next stage you get to is what's so-called rate checks. And that's where the Bank of Japan or the ministry, they're calling around to traders and saying, where is the yen? Of course, they know where the yen is. They all have Reuters and terminals and other, but this is another signaling device that if you do a rate check, then that happens right before actual intervention. We had a story recently that they sort of changed tack a little bit. We're being less sort of aggressive with the language, using the language less. That's right. So our reporting says that basically the Ministry of Finance is operating under a different playbook, that they're not going to be doing this excessive escalating verbal intervention. And if they do choose to act, they're going to try to ambush and surprise the market. What's the logic behind that? Are they just taking a leaf out of Kevin Warsh's book and the Fed chair, Kevin Warsh, and just talk less to markets in general? Or is there a sort of a specific sort of strategy at play there? It clearly is a tweak on the strategy. And when you look at, they did intervene at the end of April and early May, and it did get an immediate effect, but it evaporated within about a month. And so that's an expensive operation to disappear in a matter of weeks. They spent about $72 billion to earn, yeah, to get the end from about 162 to 155. And that's already completely evaporated. So they're not giving up an intervention, but this is just signaling that they don't want to give these kind of warning signs like they did before. Rocky, is intervention just papering over the cracks? Like, does it work? You could say that. I don't want to say it doesn't work because, you know, we don't know where the end would be without it. It's kind of hard to say where it might have been without both the intervention and the warnings of intervention. We can definitely say that the dollar-yen rate has already exceeded where it went in late April and early May. So, you know, in a way that whatever, we can definitely say that the intervention has had a shorter and shorter effect in creating a lasting change in markets. In terms of intervention, Japan's got a huge war chest, doesn't it? It's not like it's going to run out of money anytime soon. It's got the means to intervene when it wants to. Yes, and when we look at these past interventions going back to 2024, each bout tends to be worth about $30 billion. This last one that we think was multiple steps in the market amounted to $72 billion. It was a record for a monthly period. So, it certainly has the fiscal means to do more of this. I think the limitation is more in terms of will it be worthwhile and will it perhaps anger Washington, you know, if that creates ruptures in the bond market in the United States. It would be a brave sort of trader or investor that would go up against Japan, right, given that kind of wall of money that they had. It is difficult for investors to bet against Tokyo. Indeed, and, you know, what we see in the data is that shorts in the yen are at around a two-year high. So, in a way, that is traders daring the Ministry of Finance to intervene again. But in another way, if Japan does choose to intervene, the build-up in shorts actually increases the power of their intervention because that forces all those people that short at the end to cover their positions. So, it can have like a rubber band effect if Japan decides to intervene again, and it could be that there'll be more of an effect in moving the dollar-yen rate down. Right, like it amplifies it because those yen, you've effectively, you've bet that the yen is going to fall. So, when you need to cover your short positions when it starts to rise, you need to buy yen to do that. So, it sort of, it amplifies what the Ministry of Finance is trying to do. But clearly, the market is seeing like that Japan is not going to defend this 162 level anymore, and so it seems like the new line in the sand, although nobody has declared a line in the sand, but the new line that seems to be manifesting for markets is this 165 level. And so, that's where people think, where a lot of the analysts we've talked to and investors we've talked to say that that's probably a line too far for Tokyo and that they defend just before or at that mark. So, Rocky, currency intervention is one thing, is one way of sort of trying to bolster the value of the yen. The other way, of course, is to raise interest rates, right? But it's interesting there, Japanese interest rates are higher now than before, but the yen is actually weaker. So, what's going on there? Has that kind of policy lever lost its potency? It seems to. And up until a few months ago, the Bank of Japan was the only major central bank that was still on a tightening cycle. And it raised its key rate to a 31-year high of 1% last month, but it basically did nothing for the yen. And part of that is because the whole world is back on a tightening cycle because of the inflation pressures, because of the war in the Middle East. And so, in a way, the Bank of Japan kind of has missed its opportunity to close that gap with other major central bank rates that could potentially add to a tailwind for the yen. But now, with everyone raising at the same time, the gaps will stay wide. So, Rocky, where does this all leave us? Where does this leave Japan and the yen? Well, there are some bright spots in the economy, and that could lend itself to a rally in the yen on the longer term. Deflation has been largely defeated. The economy seems to be growing. The stock market has hit recent highs. Bond yields are finally yielding something for investors. So, we have seen some inflows from foreign investors who are believing in the investment story in Japan. But part of what needs to maybe change psychologically is Japanese household and household investors and institutional investors who have spent decades sending their money overseas to try to earn some returns for them to believe in the story, too, and to bring some of their money back home. A big thank you to Rocky, or should I say James, for his time and insights. You can catch all our coverage of Japan on the Reuters app and Reuters.com. Now for that quiz. I asked you to name the 1985 agreement to devalue the US dollar. Was it A, the Four Seasons Accord, B, the Plaza Accord, or C, the Hilton Accord? And the answer is B, the Plaza Accord. In 1985, the so-called G5 nations, so the US, Japan, West Germany, the UK, and France, agreed to depreciate the US dollar. It led to significant appreciation of the yen and Deutsche Mark relative to the dollar. And one unintended consequence was Japan's so-called lost decade of low growth and deflation. In 1987, the Louvre Accord was signed to stabilize the dollar and reverse the Plaza Accord's policies. This is Reuters' EconWorld. Every week we go deep on the economic principles and ideas driving the biggest news around the world. If you want to tell us what you thought of this week's show, just drop us a line in the comment section of your favorite podcast platform. This episode was produced by Eliza Davis Beard. Sound design and engineering was by Jonathan Remember, for all your daily news, just ask your smart speaker for Reuters World News, seven days a week. I'll see you back here next week.