On Tuesday, November 11, 2025, the yen fell to 155 against the dollar, prompting intervention in the foreign exchange market. Forex traders are now familiar with the routine that accompanies yen weakness. Just as on Wednesday (November 12), Finance Minister Satsuki Katayama warned dealers not to test her resolve as the yen hit a nine-month low.
Tokyo last intervened in the foreign exchange markets in July 2024, when the yen was nearing 160 dollars. What has changed since then is the new Prime Minister Sanae Takaichi, who is reorienting her monetary policy towards boosting exports through a weak yen.
Interest rate policy
This has led economic analysts to reduce expectations for interest rate hikes from the Bank of Japan (BOJ). In January, the BOJ raised interest rates to a 17-year high of 0.5%. That raised expectations that the BOJ would finally be able to normalize interest rates that have been near zero since 1999. Then came Donald Trump’s tariffs.
The fallout from the US president’s trade war on Asia’s second-largest economy has kept BOJ Governor Kazuo Ueda on hold for most of the year. The chances of a monetary tightening on December 19 – when the central bank’s board meets – have been further reduced by Takaichi’s assumption of Japan’s leadership.
Trust Economics believes that further depreciation is inevitable, especially as the Federal Reserve limits interest rate cuts and the U.S. economy remains strong despite Trump’s trade policies. There are many ways in which a weak yen could prove detrimental to Tokyo.
It could increase imported inflationary pressure, with Japan already nearing 3%, above the BOJ’s 2% target.
It could also anger the Trump administration and trigger even higher tariffs.
The biggest way it could undermine Japan is another bull market of complacency while ignoring the danger signs.
It is only now that many finance ministry bureaucrats and CEOs are realizing that 25 years of manipulating the yen to keep it low have done more harm than good.
Japan’s Decline
A weak yen has boosted GDP and corporate profits in some cases, but more importantly, it has removed the urgent need for policymakers to level the playing field and boost productivity. It has relieved CEOs of the pressure to innovate, restructure businesses, disrupt the market, and boost productivity.
As the International Monetary Fund (IMF) notes, “Japan’s overall productivity has been slowing for a decade and has fallen even more than in the United States. The steady decline in the efficiency of allocating productive resources since the early 2000s has slowed productivity and likely reflects increasing market frictions.” Furthermore, the IMF notes that “Japan’s ultra-low interest rates may have allowed low-productivity firms to survive longer than they otherwise would have, delaying much-needed economic restructuring. Reforms that would improve labor mobility between firms would boost efficiency and productivity.”
“Abenomics”again
Unfortunately, Takaichi’s plan to revive Japan’s economy is more of the same. She is a disciple of former Prime Minister Shinzo Abe, who from 2012 to 2020 tried to end the deflationary period and restore growth and innovation.
The so-called “Abenomics” that Takaichi wants to revive is the reason Japan is struggling amid Chinese economic dominance.
China’s response
Since 2015, when President Xi Jinping launched his “Made in China” initiative, Asia’s largest economy has invested heavily in AI, robotics, biotechnology, electric vehicles, renewable energy, semiconductors and other emerging technologies.
Over the same period, Japan has invested mostly in… mediocrity. With foreign exchange interventions and the BOJ hoarding government bonds and stocks, Tokyo has spent the past decade making it acceptable for bureaucrats and managers to avoid reform. Where are the Japanese innovations like DeepSeek AI or China’s BYD dominating the EV market?
In September, real wages in Japan fell for the ninth straight month as inflation outpaced nominal wages. This problem complicates the BOJ’s plans to raise interest rates. If it raises them too much, the BOJ will be responsible for a future recession. If it raises them too slowly, this year’s inflation will become entrenched as a problem in the economy.
In September, the average nominal wage, or total net earnings, rose 1.9% year-on-year to 297,145 yen ($1,922). That’s a far cry from the 3.4% rise in consumer prices in the same month.
It’s a stark reminder that the 25-year-old weak yen strategy is a ticking time bomb in the real economy of Asia’s second-largest economy, sending the currency into a downward spiral.
The yen has fallen more in real terms than the Turkish lira, which traditionally holds the record for the weakest currency among major markets. Since late 2019 – just before the Covid health crisis – only the Egyptian pound has fallen more in real terms, Trust Economics reports.
The yen’s weakness stems from Japan’s very high debt, which is forcing the bank to curb yields on long-term government bonds through open market lending. Japan is a cautionary tale of letting debt rise unchecked.
Countries can use their central banks to curb bond yields, but that simply transfers weak fiscal dynamics to currency depreciation.
A big question is how China will react to a further decline in the yen. China is facing deflation and other significant difficulties in its economy. China’s property crisis continues to deepen, eroding business and household confidence.
Xi’s Moves
Deflationary pressures are mounting as local governments’ fiscal capacity deteriorates and youth unemployment is at record levels. Nothing would give the economy a faster boost than a weaker yuan.
The yen’s decline, which has so far caused little discontent in the West, could give Xi Jinping the “space” he believes he needs to drive the yuan lower.
Geopolitical Tension
Such a move would immediately affect global markets and quickly become a geopolitical flashpoint. Other Asian countries, such as Korea, could follow suit with a weaker won, and Singapore could try to boost demand through a foreign exchange advantage.
Southeast Asian economies that played a central role in the 1997-98 crisis are watching carefully. Neither Indonesia nor Thailand could stand idly by if China followed Tokyo’s lead. Of course, the Trump administration is watching, ready to take monetary action.
Bond markets are also worried, with the gun at their feet to push long-term yields even higher.
Trust Economics reports that Takaichi’s “expansionary fiscal policies could face challenges from inflation and rising Japanese government bond yields, thereby limiting her ability to issue debt – reducing the likelihood of her following Liz Truss’s fate.”
The End of the Yen-Carry Trade
Another concern is that a continued decline will cause the yen to become volatile and the yen-carry trade to collapse. Twenty-five years of zero or near-zero interest rates have made Japan the world’s leading creditor.
For decades, hedge funds have borrowed cheaply in yen to bet on higher-yielding assets around the world. As a result, sudden moves in the yen have rattled markets almost everywhere.
It is one of the world’s largest and most heavily traded currencies, particularly vulnerable to sharp corrections. Between inconsistent U.S. policy and the specter of a new Japanese lending boom, investors have plenty of financial risks to worry about as 2025 draws to a close. In that context, a weak yen is not good news for anyone.
