Japan's yen has become embroiled in discussions about being the "world's weakest currency." Recent analyses suggest that its real purchasing power has declined even more than that of the chronically weak Turkish lira. According to the real effective exchange rate, which accounts for inflation and trade structures, the yen's fundamental strength has plummeted to historic lows.
The Nihon Keizai Shimbun reported that Robin Brooks, a researcher at the Brookings Institution, sparked debate with a post on X (formerly Twitter) on May 24, claiming, "The Japanese yen has become weaker than the Turkish lira, making it the world's weakest currency." This assertion is based on the real effective exchange rate, which measures currency strength relative to trading partners, factoring in inflation and trade volumes.
However, it is difficult to definitively state that the yen is weaker than the lira. The real effective exchange rate reflects changes in purchasing power compared to a base year, making direct comparisons between currencies contentious. The Nihon Keizai Shimbun noted that some experts argue the claim that the yen is weaker than the lira is exaggerated. Nonetheless, it is clear that the yen's effective exchange rate has been on a long-term decline, while the lira has shown signs of recovery.
According to the Bank for International Settlements (BIS), the yen's real effective exchange rate hit its lowest level since the adoption of a floating exchange rate system in 1973 in April. In contrast, the Turkish lira has appreciated by 7% since the beginning of the year. Turkey, despite high inflation, has maintained an accommodative monetary policy, leading to a collapse in currency credibility. This indicates that the yen's fundamental strength has deteriorated to a level comparable to that of the lira.
One of the primary factors hindering the yen is the trade balance. Japan's trade deficit ballooned to 20 trillion yen in 2022 but fell to under 3 trillion yen last year, with three consecutive months of trade surpluses recorded since February this year. However, ongoing instability in the Middle East could lead to rising oil prices, potentially reversing this trend. Koya Miyamae, a senior economist at SMBC Nikko Securities, believes there is a high likelihood that Japan's trade deficit could expand back to 5 trillion yen annually.
Fiscal pressures also weigh heavily. With high oil prices necessitating expanded fiscal measures, Prime Minister Sanae Takaichi announced on May 25 plans for a supplementary budget exceeding 3 trillion yen for the 2026 fiscal year. However, Atsushi Takeda, chief economist at Itochu Research Institute, warned that maintaining an accommodative financial environment while pursuing aggressive fiscal policies could undermine currency credibility, leading to rising interest rates and a potential "sell-off" of Japanese assets.
In fact, when looking solely at the exchange rate against the dollar, the yen's weakness appears less severe. Over the past three months since the Middle East crisis, the Indonesian rupiah, South Korean won, and Turkish lira have all depreciated by 4-5% against the dollar, while the yen's decline has been under 2%. However, this is largely attributed to the Japanese government's intervention in the currency market. The Ministry of Finance announced on May 29 that the intervention amount from April 28 to May 27 was 11.7349 trillion yen, marking the largest intervention in history to counter yen depreciation. Without such measures, the yen's weakness could have been more pronounced.
Consequently, some experts argue that merely defending the yen's exchange rate is insufficient for restoring its real value. Takeda believes that the success of Takaichi's growth strategy in attracting foreign investment and bolstering domestic industries will be crucial. Takeshi Higashifukasa, a senior economist at Mizuho Research Institute, emphasized the importance of anchoring expected inflation around 2%. For the yen's real value to stabilize, businesses must anticipate rising prices and increase wages, leading to higher service costs.
However, Higashifukasa and other economists caution that it may take "years" for rising inflation expectations to translate into a virtuous cycle of wages and prices. Ultimately, while currency market interventions can temporarily defend the exchange rate, the combined pressures of rising oil import costs, expansive fiscal policies, low real interest rates, and declining growth potential make it challenging for the yen's "fundamental strength" to recover in the short term.
* This article has been translated by AI.
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