{"id":3545,"date":"2026-07-30T17:59:27","date_gmt":"2026-07-30T17:59:27","guid":{"rendered":"https:\/\/trusteconomics.eu\/?p=3545"},"modified":"2026-07-30T17:59:27","modified_gmt":"2026-07-30T17:59:27","slug":"the-plunge-in-the-yen-and-debt-bring-economic-crisis-to-the-land-of-the-rising-sun","status":"publish","type":"post","link":"https:\/\/trusteconomics.eu\/index.php\/2026\/07\/30\/the-plunge-in-the-yen-and-debt-bring-economic-crisis-to-the-land-of-the-rising-sun\/","title":{"rendered":"The plunge in the yen and debt bring economic crisis to the Land of the Rising Sun"},"content":{"rendered":"\r\n\r\nJapan, with its huge debt and the yen’s slide, is bidding to be the star of the biggest economic and financial crisis in human history.\r\n\r\n \r\n\r\nThe political career of Japanese Prime Minister Sanae Takaichi is sinking almost as fast as the yen these days \u2014 and the two developments are closely linked. The yen has slipped to 164 per dollar, its weakest since 1986, driven in part by the same economic pressures that are hurting Takaichi’s approval ratings.\r\n\r\n \r\n\r\nA new Mainichi Shimbun poll<\/a> shows that support for her cabinet has fallen 10 points to 41% in mid-July, falling below 50% for the first time.\r\n\r\n \r\n\r\nHowever, the yen’s decline is worrisome for three reasons that global markets have largely overlooked.\r\n\r\n \r\n\r\n1.<\/strong> It reveals how much the ruling Liberal Democratic Party (LDP) lacks new strategies to keep up with a faster-growing China. <\/em>\r\n\r\n \r\n\r\nA weak yen has been the LDP\u2019s main growth driver for 25 years.\r\n\r\n \r\n\r\nAnd Takaichi\u2019s declining popularity is compounding the problem, as she invests political capital in an unpopular Imperial Household Law \u2014 which changes the rules governing both marriage and adoption within Japan\u2019s royal family \u2014 rather than focusing on economic concerns.\r\n\r\n \r\n\r\n2.<\/strong> \u03a4here has been an odd silence from Washington as the yen hits new modern lows.<\/em>\r\n\r\n \r\n\r\nGiven the scale of the current trade war \u2014 Trump just imposed new tariffs of 10%-12.5% \u200b\u200bon most major trading partners \u2014 one would expect sharp criticism of Japan for manipulating its exchange rate.\r\n\r\n \r\n\r\nBy contrast, the Treasury under Scott Bessent has said almost nothing about the yen.\r\n\r\n \r\n\r\n3.<\/strong> \u03a4he yen no longer seems to attract the safe-haven demand it once did amid global turmoil.<\/em>\r\n\r\n \r\n\r\nThis may reflect the broader strength of the dollar despite the yen\u2019s weakness \u2014 gold is not rising either \u2014 but it may also confirm a long-held fear in Tokyo: that global capital is simply bypassing Japan.\r\n\r\n
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China\u2019s Shadow and Geopolitical Pressures<\/strong><\/p>\r\n \r\n\r\nFor now, Tokyo\u2019s priority is to stimulate a slowing economy.\r\n\r\n \r\n\r\nJapan is forecast to grow by just 0.5% in 2026 \u2014 well below the inflation path the Bank of Japan (BoJ) has been tracking for most of the year.\r\n\r\n \r\n\r\nSince the BoJ raised interest rates to a 31-year high of 1% in mid-June, war with Iran has emerged as a serious risk, threatening to push Japan (which depends on oil imports) into stagflation \u2014 a scenario that could prove even harder to manage than the deflation of previous decades.\r\n\r\n \r\n\r\nDespite public statements and periodic intervention, the reality is that Takaichi’s government still wants a weaker yen \u2014 not necessarily a plunge to 170\/dollar, but a retreat to the $140-150 range would increase pressure on Japan’s $4.2 trillion economy.\r\n\r\n

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China\u2019s Shadow Hangs Heavy<\/strong><\/p>\r\n \r\n\r\nBeijing has spent the past two years exporting excess industrial output globally, intensifying price competition (in economic terms, deflation) that President Xi Jinping\u2019s government has struggled to tame.\r\n\r\n \r\n\r\nA stronger yen would weaken Japan\u2019s ability to compete on price in export trade \u2014 which is also being boosted by the explosion in artificial intelligence (AI).\r\n\r\n \r\n\r\nChina\u2019s SoftBank Group is now worth more than Toyota, while companies like Kioxia and Taiyo Yuden are also steadily gaining ground.\r\n\r\n \r\n\r\nRegardless of what Takaichi says publicly, she worries that a stronger yen could slow that momentum, along with the broader rally that pushed the Nikkei 225 index above 72,000 last month (it has since fallen to around 64,000, after starting the year near 50,000).\r\n\r\n \r\n

The Politics of Intervention and the Ghost of Takahashi<\/strong><\/p>\r\n \r\n\r\nStill, officials have been vocal about their anger at the currency\u2019s slide without doing much to address its root cause.\r\n\r\n \r\n\r\nFinance Minister Satsuki Katayama continues to warn that she is ready for \u201cdecisive action\u201d if the yen weakens too much, and Tokyo did intervene in the foreign exchange market in April and May when the rate exceeded 160.\r\n\r\n

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Controlling the bond yield curve<\/strong><\/p>\r\n \r\n\r\nAs Trust Economics<\/a> notes, without a credible plan to rein in Japan\u2019s skyrocketing debt, these moves are largely symbolic: if the fiscal situation becomes the dominant policy concern, currency management could increasingly give way to yield curve management in the bond market, and how the government handles that balance will shape the yen\u2019s future course.\r\n\r\n \r\n\r\nThat\u2019s why past interventions haven\u2019t worked this time around \u2014 traders have watched this pattern repeat itself too often to expect any different.\r\n\r\n \r\n\r\nTokyo still has leverage, even if using it would be risky.\r\n\r\n \r\n\r\nOne path involves persuading U.S. Treasury Secretary Scott Bessent to engage in sustained, coordinated intervention.\r\n\r\n \r\n\r\nThe most radical option would be to revive the deflationary strategy of Korekiyo Takahashi \u2014 the finance minister often called \u201cJapan\u2019s Keynes\u201d \u2014 who combined aggressive monetary easing with fiscal expansion, including direct purchases of government debt by the central bank, to pull Japan out of the Great Depression in the 1930s.\r\n\r\n \r\n\r\nFormer Federal Reserve Chairman Ben Bernanke has praised the approach, and many economists consider it a precursor to Modern Monetary Theory (MMT). Takaichi\u2019s mentor, Shinzo Abe, had followed Takahashi\u2019s lead during his 2012-2020 premiership, pushing the BoJ toward massive quantitative easing (QE) from 2013.\r\n\r\n \r\n\r\nBy 2018, the BoJ\u2019s balance sheet had grown larger than Japan\u2019s entire economy\u2014the largest among the G7.\r\n\r\n \r\n\r\nBut even Abe stopped short of fully monetizing Takahashi-style debt. The Risks of Monetary Policy and Warnings\r\n\r\n \r\n\r\nImplementing such a policy now, in 2026, could easily backfire. Twenty-seven years of near-zero interest rates and a weak yen have never revived Japan\u2019s growth engine\u2014if anything, they have dulled the urgency of structural reform.\r\n\r\n

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The loss of competitive advantage<\/strong><\/p>\r\n \r\n\r\nWhile Japan has been watching developments passively, China has reshaped global manufacturing in much the same way Japan itself did in the 1980s, and Japanese industry still has no answer to competitors like electric vehicle giant BYD or the success of AI model DeepSeek.\r\n\r\n \r\n\r\nAll of this leaves the BOJ facing a precarious period as it tries to continue its interest rate normalization.\r\n\r\n \r\n\r\nThanos Chonthrogiannis, Chief Economist at Trust Economics, points out that the inflation outlook now depends largely on developments in the Middle East and their impact on commodity prices.\r\n\r\n \r\n\r\nIf nominal wages fail to keep pace, real incomes and consumer spending could fall significantly, with any further depreciation of the yen simply adding to imported inflation.\r\n\r\n \r\n\r\nTakaichi\u2019s team appears to be learning the wrong lessons from two eras of quantitative easing \u2014 the 2000s version and Takahashi\u2019s original model in the 1930s. Modern quantitative easing (QE) dates back to 2001, when then-BOJ Governor Masaru Hayami used it to combat deflation and contain a subprime mortgage crisis inherited from the 1990s.\r\n\r\n \r\n\r\nThe approach later spread to the US, Britain, the eurozone and Australia after the 2008 global financial crisis.\r\n\r\n \r\n\r\nHowever, while these central banks eventually eased their policies, Japan was never fully weaned from monetary support. Despite years of tightening, the BOJ still holds more than half of all Japanese government bonds issued and remains the country\u2019s largest shareholder.\r\n\r\n \r\n\r\nCurrent governor Kazuo Ueda has made further progress toward moving away from zero interest rates this year than his predecessor Toshihiko Fukui did between 2003 and 2008, when rates finally returned to zero and quantitative easing was reinstated by 2009.\r\n\r\n \r\n\r\nUeda\u2019s team is expected to leave rates unchanged on July 31. In the long term, however, he is determined not to repeat that cycle.\r\n\r\n \r\n\r\nUeda\u2019s biggest obstacle may be the LDP itself, which has relied essentially on an economic playbook \u2014 fiscal stimulus \u2014 for seven decades of almost uninterrupted rule since 1955.\r\n\r\n \r\n\r\nEven senior party officials now privately admit that a quarter-century of zero interest rates has failed, with the yen\u2019s prolonged decline now the price being paid.\r\n\r\n \r\n\r\nTakaichi, however, shows little sign of departing from that tradition. Her economic approach so far seems almost indistinguishable from Abe\u2019s \u2014 and, by extension, from the Takahashi model that inspired him.\r\n\r\n

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A \u201cLiz Truss\u201d-style political meltdown<\/strong><\/p>\r\n \r\n\r\nTensions briefly peaked this month when Takaichi\u2019s government hinted that the Government Pension Investment Fund \u2014 the world\u2019s largest pension fund \u2014 might repatriate large amounts of overseas capital, a move that would have boosted the yen.\r\n\r\n \r\n\r\nTokyo has since backed down, fueling concerns that officials will instead rely on the BOJ to restart bond purchases \u2014 a move that could backfire if the central bank is seen as complicit in propping up the bond market.\r\n\r\n \r\n\r\nThat\u2019s the crux of the argument. Ueda entered 2026 looking like the governor who would finally pull Japan out of deflation, having raised the key interest rate to a 30-year high of 0.75% in December and to 1% last month.\r\n\r\n \r\n\r\nBut the Iran war, which broke out on February 28, has upended those plans \u2014 sending oil prices soaring and putting pressure on tariffs just as the government is reacting to further monetary tightening.\r\n\r\n \r\n\r\nTakaichi has openly called additional rate hikes \u201cstupid,\u201d and in March lawmakers directly questioned her about whether she was pressuring the BOJ.\r\n\r\n \r\n\r\nWhile formally independent, the BOJ faces far greater political pressure than its peers like the Fed or the European Central Bank \u2014 making Takaichi\u2019s resistance to fighting inflation particularly striking at a time when price shocks from Iran threaten to destabilize the region\u2019s economies.\r\n\r\n \r\n\r\nOne untenable factor here is that as China\u2019s growth slows, President Xi may well turn to a weaker yuan to boost exports, using political cover from Tokyo\u2019s own currency-depreciation efforts. That would certainly get Bessent\u2019s attention in Washington.\r\n\r\n \r\n\r\nAnother factor is that bond markets are getting nervous. Takaichi is seeking to end excessive fiscal austerity.\r\n\r\n \r\n\r\nLong-term government bond yields have risen sharply everywhere. Markets are losing patience with governments that have been chronically unable or unwilling to reduce public debt.\r\n\r\n \r\n\r\nThis is no time to pretend that Japan\u2019s massive debt is not a problem.\r\n\r\n \r\n\r\nHence the fears of a \u201cLiz Truss\u201d-style political meltdown in Tokyo. In late 2022, then-British Prime Minister Truss destabilized the debt market by attempting to sneak a funded tax cut behind the backs of bond traders, leading to her resignation as prime minister.\r\n\r\n \r\n\r\nThe extreme market turmoil remains a cautionary tale for Takaichi as her party considers tax cuts.\r\n\r\n \r\n\r\nWith a debt-to-GDP ratio at 260% and a rapidly aging population, Takaichi must tread carefully. This is not the first time global investors have encountered \u201cthings are different this time\u201d rumors surrounding Asia\u2019s second-largest economy.\r\n\r\n \r\n\r\nThis means anyone betting on a yen rally could regret it by the end of the year \u2013 potentially opening the floodgates for financial Armageddon.\r\n\r\n","protected":false},"excerpt":{"rendered":"

Japan, with its huge debt and the yen’s slide, is bidding to be the star of the biggest economic and financial crisis in human history. The political career of Japanese Prime Minister Sanae Takaichi is sinking almost as fast as the yen these days \u2014 and the two developments are closely linked. The yen has … <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[105,1227,59],"tags":[276,257,52,83,237,600,54,1230,277,943,292],"class_list":["post-3545","post","type-post","status-publish","format-standard","hentry","category-developed-economies","category-japan","category-proposed-fiscal-policies","tag-ai","tag-business","tag-china","tag-dollar","tag-economy","tag-exports","tag-japan","tag-sanae-takaichi","tag-technology","tag-yen","tag-yuan"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t