● Yen Meltdown, Japan Purchasing Power Craters, Rate Hike Gamble, Reshoring Fizzles, Carry Trade Shock
The news I’m delivering today isn’t just travel information level like “the Yen is cheap.” It is packed with core points, including shocking data that Japan’s national purchasing power has fallen to one-third of what it was 30 years ago, the Bank of Japan’s interest rate hike scenario to counter this, and the real reason why Japanese companies are not returning home despite the weak Yen. By reading this, you will gain hints about future exchange rate trends and global capital movements. Let’s get started right away.
[Urgent Diagnosis] Yen Value Slashed to One-Third, the Bill for Japan’s ‘Lost 30 Years’ and Interest Rate Hike Outlook
1. Shock Seen Through Data: The Yen’s ‘Real Strength’ Has Retreated to 50 Years Ago
Let’s check the facts first. According to data released by the Bank for International Settlements (BIS) and the Nihon Keizai Shimbun, the real effective exchange rate of the Yen recorded 67.73 as of January 2026.
You might not get a sense of this number, but simply put, it is the lowest figure in history since the introduction of the floating exchange rate system in 1973. Compared to April 1995 (193.95), when the Yen’s value peaked, current Yen purchasing power is about 35% level, meaning it has been slashed to one-third.
The phenomenon where we go to Japan and feel “Wow, prices are cheap” economically implies ‘national poverty,’ where Japanese people have to pay three times the price when buying goods abroad. The value of the Yen has fallen across the board against the Dollar, Euro, and even the Chinese Yuan.
2. Why Did This Happen?: The Structural Trap of the Japanese Economy Where Growth Plates Have Closed
It’s not simply because they printed a lot of money. The fundamental cause lies in the ‘disappearance of growth potential.’
Looking at Bank of Japan data, Japan’s potential growth rate, which was around 1% in 1995, slumped to the low 0% range from the late 2010s. Since the economy couldn’t grow, prices didn’t rise (ultra-low inflation), and interest rates had no choice but to crawl at the bottom (ultra-low interest rates).
As this low-interest, low-growth structure became entrenched for over 30 years, the basic stamina to defend the currency value has completely run out. This is indeed the cold report card of the ‘Lost 30 Years’ we speak of.
3. Japan’s Response: “We Will Defend by Raising Rates” But…
Now facing an urgent crisis, the Bank of Japan has pulled out the card of financial normalization, that is, interest rate hikes.
Currently, the market expects the Bank of Japan to raise the base interest rate from 0.75% per annum to the 1.5%~1.75% level. Raising rates might defend the currency value, but the problem is the side effects.
Can debt-laden small businesses (zombie companies) that have been addicted to 0% interest rates for a long time afford this interest? Naoki Hattori, Senior Economist at Mizuho Research & Technologies, also warns that “companies with higher debt dependency will suffer a greater hit.” They have fallen into a dilemma where the real economy could break while trying to control inflation and defend the exchange rate.
4. [In-depth Analysis] The Real Core Point Not Mentioned in News: Failure of ‘Reshoring’ and the Paradox of Investment
Now, this is the truly important story I want to tell you. Normally, when the exchange rate is low, it’s good because export companies gain price competitiveness, and ‘reshoring,’ where factories that went abroad return to the domestic market, should become active.
However, even though Prime Minister Sanae Takaichi won a landslide victory in the recent general election and is strongly pushing for ‘investment within Japan,’ the movement of companies returning to Japan is very sluggish.
What is the reason? It is not simply an exchange rate issue. It is because from the companies’ perspective, doubts about the future growth potential of the Japanese market have not been resolved.
The implications of this are significant:
- Disappearance of Exchange Rate Effect: The formula ‘Weak Yen = Export Jackpot’ no longer works. It means that the competitiveness of Japanese manufacturing is blocked by structural problems other than price.
- Limitations of Rate Hikes: Even if raising rates recovers some of the Yen’s value, if companies do not increase investment, the Japanese economy could fall into a deeper swamp of ‘high cost, low growth.’
- Movement of Global Funds: If Japan raises interest rates to 1.75%, ‘Yen carry trade’ funds, which borrowed Yen at low interest rates to invest globally, could be liquidated rapidly. This becomes a trigger that can cause great volatility in global stock and bond markets.
Ultimately, the current weakness of the Yen should be interpreted not as a simple failure of monetary policy, but as a signal that the economic vitality of the national brand called Japan has been depleted. If you are an investor, rather than simply betting on a Yen rebound, you should first verify whether Japanese companies can break through this structural crisis and create innovation.
< Summary >
- Yen Value Crash: Recorded real effective exchange rate of 67.73 in January 2026, purchasing power plummeted to 1/3 level compared to the 1995 peak.
- Cause: The main culprit of the weak Yen is the fall of the potential growth rate to the 0% range and the prolonged structure of low interest rates and low inflation (Lost 30 Years).
- Response and Outlook: The Bank of Japan is expected to raise the base rate to 1.5~1.75%, but there are concerns about serial bankruptcies of debt-laden SMEs.
- Core Insight: The reason companies are not returning to Japan despite the historic weak Yen is due to distrust in ‘growth potential.’ Interest rate hikes will introduce a major variable to global fund flows (Yen carry trade unwinding).
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*Source: https://www.hankyung.com/article/202602215593i#_enliple
