Chapter 3 3.6

Structural JPY Weakness

Understanding the fundamental drivers of yen depreciation and limits of intervention

Structural JPY Weakness in 2025: Why Intervention Alone Isn’t Enough

Despite massive reserves, Japan faces persistent yen depreciation pressures driven by fundamental economic factors:

Interest Rate Differential: Even after BOJ normalization to 0.50% (as of Oct 2025), Japan remains ~350-375bp below Fed (4.00%-4.25%). Carry trades (borrow cheap yen, invest in USD) remain attractive, creating structural yen selling pressure
Persistent Trade Deficit: Post-Fukushima energy import dependency (LNG, oil) creates structural USD demand. 2024 trade deficit: ¥5.8T despite weak yen boosting export revenues. Energy costs offset competitiveness gains
Demographics & Savings Decline: Aging population drawing down savings reduces capital outflows (repatriation of foreign assets). Household savings rate fell from 10% (1990s) to 2.5% (2025), weakening yen support from domestic savers
Portfolio Rebalancing: Japanese institutional investors (pensions, life insurers) increased foreign bond allocation from 15% (2010) to 28% (2025) to chase yield. This structural outflow (¥15-20T annually) weighs on yen
Tourism Boom: Weak yen attracts record tourism (35M visitors in 2024), but Japanese outbound travel and student education abroad create net service deficit of ¥2T+

MOF's $1.34T reserves are formidable, but can't overcome fundamental forces:

Fighting the Fed: As 2022-2024 showed, intervention without BOJ policy support is like pushing water uphill. Until rate differentials narrow substantially (BOJ to 1.5-2%), yen faces gravity
Finite Ammunition: While $1.34T sounds large, it's only ~9 months of Japanese imports. Sustained defense against market forces would deplete reserves quickly. 2024's $97B spending showed the limits
G7 Constraints: Unilateral intervention faces political backlash. US Treasury scrutiny limits Japan's freedom to act without "excessive volatility" justification

Japan's FX reserve strategy is evolving as BOJ gradually normalizes policy:

Reduced Intervention Need: If BOJ reaches 1.5% policy rate by late 2026 (market consensus), rate differential with Fed narrows to ~300bp. USDJPY would stabilize around ¥135-140 without intervention
Reserve Adequacy Comfortable: IMF metrics suggest Japan's reserves far exceed needs: 15 months import cover (vs 3-6 month guideline), minimal short-term external debt, strong current account. Could sustain reserves at $1.0-1.2T without crisis risk
Potential Diversification: MOF may gradually reduce USD concentration (currently 81%) to 70-75%, adding EUR/CNY exposure. But USD liquidity constraints remain binding
Carry Income Decline: As BOJ raises rates, positive carry shrinks from $52B (2025) to ~$30B (2027 if BOJ at 2%, UST at 4%). Still profitable but less lucrative

Official Data:

Ministry of Finance, International Bureau: "Japan's Foreign Exchange Reserves" (monthly statistical release). Available at: https://www.mof.go.jp/english/policy/international_policy/reference/official_reserve_assets/index.htm
Bank of Japan: "Foreign Exchange Intervention Operations" (monthly intervention amounts). Available at: https://www.boj.or.jp/en/statistics/br/fxdaily/index.htm

Further Reading:

For FX reserves composition and size, see Section 2.16: Japan's Foreign Exchange Reserves
For intervention operations and effectiveness, see Section 3.1: Currency Intervention Strategy
For BOJ monetary policy normalization path, see Section 3.3: History of Japan's Monetary Policy