– The Japanese yen has plunged to an 18-month low against the US dollar, reaching approximately 159 yen per dollar, driven by Middle East conflict disrupting oil supplies.
– Long-term yen depreciation stems from Japan’s persistent trade deficits, hollowed-out manufacturing, and the failed policies of Abenomics.
– Japan’s core CPI rose 3.1% in 2025, outpacing wage growth, squeezing household purchasing power and increasing social strains.
– In a strategic shift, Japan is betting on military exports to revive its economy, leveraging its industrial base but facing political and supply chain risks.
– Investors must assess currency volatility and geopolitical factors when exposed to Japanese assets or Asian markets.
The Yen’s Historic Plunge: From Safe Haven to Crisis Currency
The Japanese yen is experiencing a historic collapse, with exchange rates hitting lows not seen in years. This yen depreciation crisis, triggered by geopolitical turmoil in the Middle East, reveals profound vulnerabilities in Japan’s economic model. Once a safe-haven currency, the yen’s fall reflects decades of trade imbalances, monetary experimentation, and shifting global dynamics. For institutional investors and corporate executives, understanding the roots of yen depreciation is essential for risk management and opportunity identification in Chinese equity markets and beyond.
Immediate Triggers: Middle East Conflict and Oil Shock
Since the U.S.-Israel coalition strikes on Iran in late February, the yen has continuously weakened, sliding from around 155 yen per dollar to over 159 yen per dollar, an 18-month low. Against the Chinese yuan, it fell to 4.32 yuan per 100 yen, a record low. This yen depreciation is directly linked to Middle East tensions, which have damaged oil facilities and blocked the Strait of Hormuz, spiking oil prices.
Japan relies on the Middle East for 90-95% of its oil, and as an island nation, higher fuel costs raise transport expenses for imports and exports. Investors fear this will cripple Japanese manufacturing and spur inflation, leading to massive selling of yen, stocks, and bonds.
Long-Term Erosion: The Fall of a Safe Haven
The yen’s decline is not new. Since 2012 and the advent of Abenomics, the yen has slid from about 70 yen per dollar to 120 yen per dollar by 2020. The Bank for International Settlements reported that in January 2026, the yen’s real effective exchange rate index dropped to 67.73, the lowest since 1973, meaning the yen’s purchasing power is one-third of its peak 31 years ago.
Once a global safe-haven currency, the yen would rise during crises like the 2008 financial crisis or the 2020 pandemic. Now, it falls first, losing its 避险货币 (safe-haven currency) status. This yen depreciation has reduced Japanese overseas travel, with passport holders dropping from 24% in 2019 to 17% in 2025.
Understanding the Downward Spiral: Immediate Triggers and Long-Term Trends
The Impact of Rising Oil Prices on Japan’s Economy
Japan’s energy insecurity is acute. With over 90% dependence on Middle Eastern oil, price shocks directly feed into production costs and consumer prices. The core CPI rose 3.1% in 2025, while nominal wages grew only 2.3%, eroding real incomes. Essentials like eggs and beef have seen prices triple over years, leading to phenomena like “buying cabbage by the leaf” or “selling chicken legs separately” in supermarkets.
Social indicators reflect this strain: crime rates rose from 610,000 cases in 2020 to 774,000 in 2025, with theft comprising 70%. Public health issues, such as syphilis cases exceeding 13,000 annually for four years, underscore deepening societal stress.
Structural Weaknesses: Trade Deficits and Manufacturing Decline
At its heart, yen depreciation ties to trade. Post-WWII, Japan benefited from a fixed exchange rate of 360 yen per dollar, boosting exports. But after the Plaza Accord in 1985, yen appreciation drove manufacturing offshore. Companies like Toyota, Nissan, and Sony moved production overseas, taking supply chains with them.
Japan’s share of global manufacturing fell from over 20% in the 1980s to 10% in 2012, while China’s rose from 5% to 20%. By 2021, Japan’s share was 6%, and from 2021 onward, it has run persistent trade deficits, hitting 5.2217 trillion yen in the 2024 fiscal year. This structural weakness fuels ongoing yen depreciation.
The Lost Decades: How Trade Shaped Japan’s Economic Fate
From Fixed Exchange Rates to Plaza Accord
The post-war fixed exchange rate era gave Japanese exports a competitive edge, with annual export growth averaging 16.8%. However, the Plaza Accord forced yen appreciation, making domestic production costly and prompting offshoring. This began the “lost decades,” characterized by stagnant wages, low birth rates, and economic lethargy, setting the stage for long-term yen depreciation.
The Hollowing Out of Japanese Industry
As manufacturing moved abroad, Japan retained profits from technology and branding, but domestic industry withered. In low-tech goods, China and other Asian nations captured market share; in high-value areas like cars and electronics, China’s technological advances eroded Japan’s dominance. This hollowing out is a core driver of yen depreciation, as trade balances deteriorated.
Abenomics and the Exchange Rate Double-Edged Sword
The Mechanics of Abenomics: Printing Money and Negative Rates
Under Prime Minister Shinzo Abe (安倍晋三), Japan embraced Abenomics, involving massive monetary easing and negative interest rates. The Bank of Japan printed yen aggressively, increasing supply to drive down the currency. Negative rates encouraged carry trades, where investors borrow cheap yen to invest in higher-yielding assets abroad, further pressuring the yen.
The goal was to boost exports through yen depreciation, mimicking the post-war advantage. However, this is a double-edged sword: while cheaper yen should help exports, it raises import costs for energy, food, and components.
The Vicious Cycle: Depreciation, Import Costs, and Stagnant Exports
Abenomics failed to revive exports significantly. Japan’s manufacturing share kept falling, and digital trade deficits soared to 6.46 trillion yen in 2024, dubbed the “digital deficit.” The policy created a cycle: trade deficits lead to yen depreciation, which hikes import costs, but exports don’t recover, widening deficits. This yen depreciation became uncontrolled as the U.S. Federal Reserve raised rates from 2022, widening interest differentials and accelerating carry trades.
Japan is trapped: it can’t easily raise rates due to massive public debt of 1,342 trillion yen, and it can’t influence Fed policy. Thus, yen depreciation continues unabated, as seen in recent market turmoil.
A Dangerous Gamble: Japan’s Pivot to Military Exports
Leveraging Military Industrial Base for Economic Revival
To counter yen depreciation and trade woes, Japan is turning to military exports. Its defense industry, maintained through decades of self-reliance, has potential. Companies like Mitsubishi (三菱), Kawasaki (川崎), and IHI (石川島播磨重工) have dual-use technologies. Despite high costs, Japan has production efficiency, as seen with the Mogami-class frigates outpacing U.S. counterparts.
The U.S. is increasingly relying on Japanese suppliers for F-35 parts, Patriot missiles, and other gear. In 2024, U.S.-Japan defense cooperation agreements formalized this, aiming to make arms a key export. In 2024, Japan’s top five defense contractors saw sales surge 40% to $133 billion, offering a potential buffer against yen depreciation.
Political Hurdles and Supply Chain Vulnerabilities
This strategy requires political shifts: Japan must align closely with U.S. strategic interests and revise its “Three Principles on Arms Exports” to allow broader sales. Right-wing forces push for constitutional changes and greater militarization, tying economic revival to geopolitical risks.
However, China is responding by restricting exports of raw materials and components to Japanese entities, including 20 firms added to a control list in February 2025, such as Mitsubishi and Kawasaki. This exposes Japan’s supply chain dependencies, challenging its military export ambitions and potentially exacerbating yen depreciation if supply chains fracture.
Implications for Investors and the Global Market
The yen depreciation crisis highlights Japan’s structural economic challenges, from energy dependence to industrial decline. While short-term factors like Middle East conflict exacerbate the slide, long-term trends of trade deficits and policy missteps are pivotal. Japan’s bet on military exports is a high-stakes gamble that could reshape regional dynamics.
For investors, this means heightened currency risk in Japanese assets. Diversification, hedging strategies, and close monitoring of Bank of Japan policies are advisable. Additionally, watch for spillover effects in Chinese equities, as Japan’s economic struggles may influence Asian market sentiment. Engage with expert analysis and real-time data to navigate this volatile landscape, ensuring informed decisions in a rapidly changing global economy where understanding yen depreciation is key to success.