Recently, we have witnessed a striking event in the world of finance: the Japanese yen has hit unprecedented lows against the US dollarIt's remarkable to note that the yen's decline has reached lengths not seen since records began in 1971, marking it as the longest drop in historyWhile fitness influencers in Japan like Liu Genghong are captivating audiences with their workouts, an exchange rate shift means that one Chinese yuan can now be traded for nearly 20 yen—a stark contrast to the 14 yen per yuan exchanged back in 1997 when Liu was just starting his career as a performer.

What does this mean for consumers and the economy? Some clever individuals have playfully noted that buying Japanese goods with yuan feels like a 20% discountHowever, as the yen continues to plunge, there may be even greater savings ahead, but one must navigate the complexities of currency fluctuation and international trade.

Many, particularly younger folks like Xiao Ming, are puzzled by this phenomenon: why is a currency that ranks as the world’s third largest safe-haven asset experiencing such a dramatic drop? After all, even the Russian ruble has managed to rebound against other currencies.

The decline of the yen has not happened overnight

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Since 2012, Japan has actively pursued a strategy of yen depreciation, frequently infusing money into the economyThis approach is essentially a response to dire economic challenges, and it certainly isn’t due to a lack of effort on the part of the Japanese people.

Japan is an island nation with limited space and abundant people, yet it is heavily dependent on imports for its energy needsWith a yearly requirement to import 75 million tons of natural gas—making Japan the second largest importer globally—the country relies on other nations for nearly all its energy resourcesIt also imports approximately 3 million barrels of oil daily, placing it fourth in global rankings, and is the third largest coal importerTo make matters worse, Japan's energy self-sufficiency rate is a meager 12%, with staple foods also facing similar import dependenciesAbout 70% of Japan's wheat, fruits, and vegetables come from abroad, leading to a food self-sufficiency rate of merely 37%. Such statistics paint a stark picture of a country that starts its economic game with profound handicaps.

Given this context, how does Japan generate revenue? Through exports

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The Japanese people work exceptionally hard to produce automobiles, televisions, smartphones, home appliances, and other electronic devices, selling them all over the globeSuccessfully transitioning from importing raw materials to becoming a net exporter took immense effort, allowing the nation to finally generate a trade surplusYet, as the 21st century unfolded, the dynamics shifted once again.

With the shift of lower-end manufacturing to countries with cheaper labor costs and the lack of breakthroughs in high-end production, Japan finds itself confronting fierce competition from products of various nations, leading to a trade deficit after previously striving towards a balanceIn simpler terms, selling goods has become significantly harderWhat can be done to remedy this situation? The solution? Deliberately depreciating the yen to stimulate exportsSuch measures reduce prices for Japanese goods, thereby encouraging higher sales volumes.

This strategy proved effective for a time; Japan managed to reverse its trade deficit and return to surplus after three years

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However, just as the nation glimpsed recovery, a global crisis struck, illustrating the inherent risks associated with an export-reliant recovery strategy.

What did this crisis entail? It was globally significant, wreaking havoc shortly after the country began to regain its economic footingExports plummeted by over ten percent, and tourism experienced a catastrophic drop, declining by a staggering 80%. Expectations had been set on an eagerly awaited recovery, only for reality to deliver a shock.

The crux of the issue lies in the risks posed by maintaining lower yen values to support exportsImporting vast quantities of raw materials becomes increasingly costly when the yen depreciates, creating a paradox where both the procurement of essential materials and the preservation of export volumes become unmanageableAs the prices of imported commodities began to skyrocket, global economic sluggishness exacerbated the situation, as consumers worldwide tightened their wallets in response to expensive Japanese products.

The situation is dire for Japan right now

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Inflation has hit a peak not seen in over 30 years, and businesses are skyrocketing their prices—13 months of continuous increases have put pressure on the everyday lives of Japanese citizensSimultaneously, the nation continues to grapple with demographic challenges, with an aging population and declining birth rates leading to a low consumption environment.

As companies struggle to sell their goods, the pressure to raise prices due to rising raw material costs doesn’t lead to higher revenues; consumers refrain from purchase further perpetuating a cycle of economic stagnationWith households increasingly saving money—Japan's financial asset levels soared to historic highs, reaching over 200 trillion yen, roughly four times the nation’s GDP—the result is a consumer landscape fraught with uncertainty and indifference to spending.

To make matters worse, the US Federal Reserve has been quickening its pace of interest hikes, while Japan maintains a policy of negative short-term interest rates

With the yield on 10-year government bonds hovering near zero, the appeal of holding yen diminishes, prompting a further sell-off, resulting in the currency plunging yet againCurrently, Japan seeks to negotiate with the US to find relief from this financial storm.

With looming questions surrounding possible interest rate adjustments, many wonder if such a move could stabilize the yenHowever, given Japan's expansive debt—over 130 trillion dollars against a GDP of merely 50 trillion dollars—the prospect of raising rates seems virtually impossibleThe country is caught in a bind: any attempt to increase interest rates would merely add to its burdens.

The intricate nature of modern economics dictates that Japan cannot simply find a direct solution; neither devaluation nor interest rate increases present viable alternativesThe market fears potential further depreciation is on the horizon, with a growing consensus suggesting that the yen might breach the critical barrier of 135, even predictions suggesting it could rise as high as 150 yen against the dollar