Yen’s Continuous Decline Sparks Renewed Interest in Structural Reforms in Japan

Japanese policymakers are grappling with the persistent decline of the yen, focusing on structural economic factors rather than market intervention. Data shows that Japan spent approximately 9 trillion yen to stabilize the currency, which hit a 34-year low against the dollar.

The widening interest rate gap between the U.S. and Japan is often blamed for the yen’s weakness, but policymakers are now looking at deeper issues like Japan’s diminishing global competitiveness. The Ministry of Finance has set up a panel to investigate the country’s current account and identify structural problems.

While the panel aims to strengthen Japan’s global competitiveness and encourage reinvestment of profits earned overseas, it does not discuss foreign exchange issues directly. Structural economic reform is seen as crucial to addressing the root causes of the yen’s decline.

Former Prime Minister Shinzo Abe’s “Abenomics” strategy, launched a decade ago, has struggled to implement structural reforms due to ultra-easy monetary policies. Policymakers believe that changing Japan’s economic fundamentals is essential to altering the currency’s value in the long term.

Despite Japan’s current account surplus, changes in the composition of the surplus, such as increased income from securities and direct investments overseas, may be contributing to the yen’s weakness. Analysts suggest that a significant portion of the income earned abroad is not repatriated, keeping the currency undervalued.

The panel is expected to present its proposals in June, aiming to address these structural issues and restore faith in the yen among households. Failure to do so could lead to further outflows of cash and deposits overseas, posing a significant risk to Japan’s economy.