Japan’s Ministry of Finance intervened in foreign exchange markets in late April and early May 2025, pushing the exchange rate from around 161 yen (US$1.01) to around 155 yen (US$0.97). The moves were decisive and succeeded in slowing the pace of depreciation. Yet the central issue is not whether intervention can stabilise markets in the short term. Policymakers must grapple with why the currency continues to gravitate toward the 160-yen level — and why it no longer rebounds on its own.
In the past, sharp depreciations were often followed by partial corrections once external pressures eased. But structural constraints mean the yen increasingly weakens quickly but shows limited capacity to recover, even when conditions become less adverse.
The yen’s weakness increasingly reflects Japan’s domestic conditions. One key factor is the country’s heavy dependence on imported energy. Rising oil and gas prices worsen the trade balance and generate inflationary pressures. Since 2022, inflation in Japan has remained largely cost-push, eroding real incomes and weakening consumption.
Cost-push inflation suppresses purchasing power and limits economic momentum. In Japan’s case, this dynamic is further complicated by demographic pressures. A shrinking and aging workforce has led to acute labour shortages, which in turn have pushed nominal wages higher. But this wage growth reflects supply constraints rather than strong demand.
