The Australian dollar is once again climbing against the Japanese yen, back towards its highest level in decades. If you have an overseas holiday booked for Japan, you’re in luck. Your dollars will go significantly further.
Author
- Rand Low
Associate Professor of Quantitative Finance, Bond University
But for the United States and Japanese governments, the weakening yen has been ringing some alarm bells.
At the end of July, the two governments took the rare step of working together to actively prop up the yen, which had hit its lowest level against the US dollar since 1986 .
This market intervention – which involved the Bank of Japan and US Treasury buying tens of billions of dollars worth of yen in a single day to support its value – worked for a short while. Last week, the yen bounced back to a three-month high, before steadily sinking again.
Here’s why the US and Japan may be considering stepping in once again to try to prevent the yen from falling further, and what this all means for Australia and the rest of the world.
How we got here
Japan is a high-tech manufacturing export nation. One of the world’s largest economies , it is a major exporter of advanced manufacturing goods such as cars and electronic equipment.
At the same time, it is relatively resource poor, and relies on imports to meet many of its food (such as beef), energy (oil and natural gas) and raw material needs.
Japan has suffered from sluggish economic growth since the 1990s. Until very recently, Japan’s economy had been ” deflationary ” for most of this period, with prices trending lower and lower – the opposite of inflation.
A shared goal
The US and Japan both want the yen to strengthen – but for quite different reasons.
For Japan, a weak yen isn’t all bad news. When the Japanese yen is low relative to other countries, it makes Japanese goods and exports cheaper and therefore more competitive.
Just this week, official figures revealed Japan’s current account surplus – how much more it earns from abroad than spends abroad – reached its highest level on record in the first half of this year.
This helps keep people in Japan employed. However, at the same time, it makes imports much more expensive, putting pressure on the cost of living.
These higher costs can also impact imports of raw materials , offsetting the advantages the weak currency provides exporters.
The US government’s motives for getting involved are slightly different. Japan holds more than US$1.14 trillion (about A$1.6 trillion) in US government debt , making it the US government’s single largest creditor.
Why does that matter? If the yen weakens further, and the Bank of Japan needs to raise cash to intervene, one way to do that would be to start selling US government bonds. That would push up interest rates for the US government, and in turn US consumers.
Keeping competitive
There is another factor at play for the US. The US government – led by President Donald Trump – has made a concerted push to boost local manufacturing, including by imposing tariffs on countries around the world.
Japan’s exports to the US currently face a 12.5% tariff . A weaker yen makes Japan more competitive against the US, which can undermine the attempt to boost US manufacturing.
The need to tread carefully
However, boosting the yen isn’t without risks of its own.
To counter Japan’s weak economic growth, for decades the Bank of Japan has kept interest rates extremely low. This encouraged people and businesses to borrow money, invest and spend to boost its economy.
But these low interest rates have set Japan apart from much of the rest of the world, where rates have been elevated in an attempt to tackle inflation.
To take advantage of this, many banks have been borrowing money in Japanese yen (at 1%) and then investing it in currencies that have higher interest rates (such as the US and Australia, where rates are above 3% or 4%) to generate a profit. This is known in financial markets as the “carry trade”.
But if this “carry trade” unwinds, it can cause huge volatility on global financial markets. This happened in 2024 , when Japan raised interest rates. Investors then rushed to sell hundreds of billions of dollars worth of assets to pay back loans in yen.
Australians might currently be enjoying a favourable exchange rate, making a trip to Japan look enticing. But we – like the rest of the world – are also exposed to the ripple effects of what happens next.
