Japan Deploys $97 Billion to Stem Yen Collapse
The yen has lost 60% of its real value since 1999, prompting massive intervention by Japanese authorities.
Key points
- Japan intervened with $97 billion between July 30 and August 26 to support the yen.
- The yen's real value is down 60% since 1999 and 34% since mid-2020.
- Japan's relative creditor status has shrunk despite remaining the world's third largest.
Japan spent $97 billion in foreign exchange intervention between July 30 and August 26 to stop the yen from falling further. The U.S. Treasury also acted, but its contribution was modest compared to the scale of Japanese spending.
This spending follows a sharp drop in the currency's value over recent months. Japanese residents sold $60 billion in Treasury bills and $2.8 billion in bonds in May alone.
Yen value drops sharply
The real effective exchange rate of the yen is now 60% lower than at the end of 1999. It is also 34% weaker than its level in mid-2020, marking a historic decline.
Inflation in Japan has been much lower than in the U.S., euro area, and China. Prices rose only 16% in Japan since 1999, while they rose 98% in the U.S. and 78% in the euro area.
Structural causes drive weakness
Brookings notes that Japan's economic weight has fallen sharply over the past 25 years. This decline results from modest growth, a shrinking population, and continued currency depreciation.
Monetary policy divergence played a key role after the pandemic. Japan kept interest rates low while trading partners tightened policy, making the yen a popular funding currency for carry trades.
Creditor status remains significant
Japan remains the third largest creditor globally in absolute terms. However, its relative importance has shrunk significantly compared to two decades ago.
The country is still an important creditor to the United States. Yet its position relative to U.S. or world GDP is now much smaller than in the past.
