TOKYO, July 25 (Xinhua) -- This week, the Japanese yen weakened sharply, falling past the 163 line against the U.S. dollar and continuing to edge closer to 164, repeatedly touching fresh lows not seen in nearly 40 years.
Market analysts said that while the yen's latest slide has been partly driven by short-term pressure from external shocks, the deeper cause lies in structural problems that have accumulated in Japan's economy over the long term.
On one hand, the wide interest rate differentials between the United States and Japan, compounded by geopolitical tensions pushing the U.S. dollar higher, continue to weigh on the yen. On the other hand, sluggish growth in emerging industries, rapid population aging and other long-standing challenges have steadily eroded the currency's fundamentals.
Against this backdrop, short-term intervention by the Japanese government is widely seen as unlikely to reverse the yen's medium- to long-term depreciation trend.
SAFE-HAVEN APPEAL WEAKENS
Escalating geopolitical risks worldwide, persistent tensions in the Middle East, and a shift in the traditional trading logic of the foreign exchange market have combined in recent months. Amid these multiple factors, the yen's traditional status as a safe-haven asset during periods of geopolitical turmoil has notably weakened.
Analysts noted that Japan is heavily reliant on the Middle East for imports of oil and other petroleum products. Prolonged disruptions to shipping through the Strait of Hormuz have pushed up global oil prices, markedly increasing Japan's energy import costs, widening its trade deficit and adding to imported inflationary pressure, all of which continue to weigh on the yen's fundamentals. The safe-haven demand generated by geopolitical conflicts has proven insufficient to offset the negative impact of rising energy costs.
Meanwhile, markets are concerned that a rebound in energy prices could drive up global inflation, causing the U.S. Federal Reserve to keep interest rates elevated for longer than expected. This would further entrench the wide U.S.-Japan interest rate gap, allowing carry trades to continue exerting downward pressure on the yen.
Several international financial institutions noted that the traditional pattern of yen strengthening during periods of geopolitical turmoil is now changing.
Foreign exchange strategists at ING, a Dutch multinational banking and financial services corporation, said that Japan's heavy reliance on energy imports has amplified the negative economic impact of the Middle East conflict on the country, with the headwinds from rising oil prices now outweighing the yen's traditional appeal as a safe-haven asset.
STRUCTURAL CHALLENGES PERSIST
As the yen fell to its weakest level against the U.S. dollar in nearly four decades, renewed attention has turned to the deep-rooted structural vulnerabilities facing Japan's economy, including industrial hollowing-out, weak growth momentum, sluggish development of emerging industries and the mounting pressures of public debt and an aging population. These persistent problems continue to prevent Japan from emerging from its prolonged economic malaise.
Akira Nakaminato, a visiting professor at Japan's Tama University, said that when Japanese companies shifted production overseas in the past, the move was not only driven by exchange rate considerations but also by a desire to stay close to local markets.
Today, structural challenges, including a shrinking labor force and concerns over the stability of electricity and energy supplies, are undermining incentives for manufacturers to bring production back to Japan, he added.
Meanwhile, although nominal wages in Japan have risen in recent years, real wages remain under sustained pressure, eroding household purchasing power and undermining domestic demand as a stable driver of economic growth.
At the same time, Japan's heavy government debt has constrained policymakers, leaving little room for significant monetary tightening and limiting the tools available to respond.
Japan's Asahi Shimbun pointed out in a recent article that one of the key reasons behind the yen's continued weakness is Japan's declining international competitiveness.
The article quoted Masashi Hashimoto, senior economist at the Institute for International Monetary Affairs, as saying that 39 years ago, Japan's economy was robust and the yen was on a rising trajectory worldwide, whereas today the currency is stuck in a long-term downtrend.
DEPRECIATION TREND HARD TO REVERSE
Whenever the yen weakens sharply, market attention invariably turns to whether the Japanese government and the central bank will intervene in the foreign exchange market to prop up the currency.
Between late April and May this year, Japanese authorities carried out large-scale yen-buying intervention, providing a temporary boost to the currency. However, the effect proved short-lived, with the yen quickly resuming its downward trajectory.
This week, amid the yen's steep fall, Japanese Finance Minister Satsuki Katayama reiterated on three consecutive days, from Wednesday through Friday, the government's readiness to take decisive action if necessary to stabilize the currency. But the warnings appeared to do little to discourage investors betting on further weakness.
Takeshi Minami, chief economist at Norinchukin Research Institute, said that since the U.S. dollar rose above the 160 yen level, Japanese authorities have repeatedly resorted to "verbal intervention" to warn the market. However, he said, most market participants believe that another round of large-scale intervention by the Japanese government faces a high threshold, given external constraints such as the divergence in U.S. and Japanese monetary policies.
Tohru Sasaki, chief strategist of Fukuoka Financial Group, argues that exchange rate intervention alone addresses only the symptoms rather than the underlying causes. Unless Japan can tackle deeper structural issues, such as persistent fiscal expansion, a prolonged low interest rate environment and broader economic imbalances, the yen's depreciation will remain difficult to reverse.
Market watchers broadly believe that the traditional boost a weaker yen once gave to exports is fading and is no longer sufficient to offset the dual pressures of rising import costs for energy and raw materials and sluggish domestic demand. ■