At one point, the exchange rate hit the 160 yen level to the dollar, causing a stir as a historic depreciation of the yen. At 160 yen to the dollar, it will be the weakest yen in 34 years. Since the Plaza Accord in 1985, the Japanese economy has been plagued by a strong yen. This changed around 2013, and the reality is that the yen is now suffering from excessive depreciation.

This historic milestone of 34 years (or 33 years) is also occurring in stock prices and wage increases. I have a hunch that there is some kind of huge underlying structural change, and that this is the first phenomenon that has occurred on the surface in 34 years. I don’t know what the huge structural change is, but I would like to explore it a little in this article.

A commonly heard structural shift is the view that the era of deflation is over. That explains stock prices and wage increases. It is true that the value of the currency depreciates when inflation occurs, but Japan’s inflation rate is lower than that of other countries, which cannot explain the extreme depreciation of the yen. Rather, Japan’s characteristic is that the real economy is weak, so the Bank of Japan is unable to raise interest rates, and the real interest rate (= policy rate minus the inflation rate) is low. The depreciation of the yen can be explained by the low real interest rates here. Even though deflation has ended, the Japanese economy is weak and real interest rates are low, resulting in a historically weak yen.

To explain this in more detail, even in a country where inflation is increasing, if the interest rate level is raised, the currency will not depreciate. Japan has long had a low interest rate policy and lifted negative interest rates in March 2024, but it is expected that the policy rate will only be raised slowly after that. Even if the economy turns into an inflationary one, the currency will not be bought because the economic strength is weak. Even if we make the transition, it is frustrating that the economy will not become stronger.

It can be argued that rising stock prices and wages are evidence that Japan’s economy is becoming stronger. However, Japanese companies make more money overseas than they do domestically. The rise in stock prices symbolizes that companies have shifted to making money overseas in response to domestic weakness. The high wage increase rate also reflects the strength of corporate profits, but wage increases centered on large companies are not expected to benefit the Japanese economy as a whole. Even though it is the first time in 34 years, there are still many weaknesses in the Japanese economy, and these are the reasons behind the weak yen.

Up until now, the Japanese economy has been suffering from deflation for a long time, and Japanese companies have not been evaluated well. That is about to change. Even if the domestic market is difficult to grow due to population decline, companies can expand their profits by increasing their ability to earn money overseas. As profitability increases, wages can be raised and better labor can be absorbed. On a macro level, disparities arise between companies, leading to polarization. Government debt also remains huge. However, if companies expand their profits and even some wages increase, the government’s tax revenue will increase. Even if the Bank of Japan is forced to continue with its relatively low interest rate policy, the government’s fiscal management will likely go smoothly. In summary, in 2024, the Japanese economy appears to have moved into a cycle in which it continues to operate, with many weaknesses remaining. This historical shift will mark a shift to a different form of inflationary economy than in the past.