For decades in Japan, it was accepted as gospel: A weak currency makes companies more competitive and bolsters the economy.
Part of that promise came true last year: As the yen tumbled to a 37-year low against the dollar, big brands like Toyota Motor reported the highest profits in Japanese history. Stocks soared to record highs.
Yet for the majority of Japanese households, the weakened yen has done little more than drive up the costs of basic living expenses, such as food and electricity. Figures released Monday showed that while Japan’s economy picked up pace in the second half of 2024, its inflation-adjusted growth rate for the full year slowed to 0.1 percent. That was down from 1.5 percent the prior year.
Attempting to stimulate exports by weakening a currency has long been a policy tool for countries seeking economic growth: President Trump has said he wants a weaker dollar to help American manufacturing. Japan provides an example of what can happen when a depreciated currency, even if it helps exports, crushes consumer purchasing power by worsening inflation.
“In economics, they teach us that everything has a benefit and a cost, and it’s about asking which is greater,” said Richard Katz, an economist who focuses on Japan. Of the yen trading at around 153 to the dollar, “this is clearly not the way to run a railroad,” Mr. Katz said. “It would be good to take a lesson from this.”
The figures released on Monday show that household spending shrank slightly in 2024, after expanding in the previous three years. Unlike in the United States, where strong consumption helped the economy surge back after the Covid-19 pandemic, prolonged weak spending in Japan has left its real gross domestic product barely above prepandemic levels.
With tariffs that Mr. Trump has vowed to impose widely on American trading partners, including Japan, expected to further strengthen the dollar against the yen, growing public dissatisfaction with inflation is putting pressure on Japanese lawmakers — who face upper house elections in July — to find a way to reverse the yen’s slide.
In the past, Japan welcomed a weak yen in large part because its economy was highly dependent on exports. But over the past two decades, Japanese companies have delegated more of their production and sales to subsidiaries outside of the country.
Over the same span, Japan became more dependent on imports, including fuels like coal and gas used to produce electricity. Since Japan shut most of its nuclear plants following the 2011 Fukushima disaster, imports have accounted for around 90 percent of its total energy supply. It also spends more on imported agricultural products than it produces domestically.
A weaker currency can help stimulate an economy if companies use the money they make from exports to increase hiring and salaries, and invest in their domestic capacity, Mr. Katz said. “In Japan, we’re seeing none of that trickledown,” he said. “On the contrary, consumers are just being squeezed by the higher import costs.”
Inflation has meant people like Masumi Inoue, a single mother working at a securities firm in Tokyo, have to pay more for the basics. She feels burdened by the cost of everything from bread and vegetables to the rice she uses for her 5-year-old daughter’s school lunches.
Ms. Inoue has begun trying to cut back. She recently stopped going out to lunch and has started sending her daughter to Lion Heart, a nonprofit organization in the outskirts of eastern Tokyo that provides free after-school dinners and tutoring. “Getting meals a couple times a week helps,” Ms. Inoue said. Rising costs “have been very tough on our family finances.”
Many others in Japan appear to share Ms. Inoue’s sentiments. In a December survey, 60 percent of households said their economic situation was worse than a year earlier, compared to just 4 percent who said conditions had improved. Consumer confidence levels are far below where they were before the pandemic.
Growing public dissatisfaction with inflation is putting pressure on Japanese officials to find a way to reverse the yen’s slide. Last year, Japan spent tens of billions of dollars intervening in the foreign exchange market to prop up the yen. But the currency is still weak and spending still feeble, prompting fresh debate about what actions the country’s central bank should take.
The yen’s slide over the past three years was spurred in large part by the Bank of Japan’s longtime policy of keeping interest rates at or below zero. Its goal was to encourage inflation after decades of stagnant prices, but Japan’s low rates also led investors to seek higher returns elsewhere, weakening the yen.
Over the past year, the Japanese central bank has been deliberate in raising rates, and consequently causing the yen to strengthen. Consumers could absorb the hit from inflation driven by a weak yen because companies — earning more from the exchange rate — were offering higher wages, the central bank reasoned.
However, with wage gains having failed to keep pace with inflation for much of the past three years, some economists argue that the Bank of Japan should pivot away from placing its main focus on overcoming deflation. Instead, they say, it should focus directly on encouraging domestic consumption — more aggressively raising interest rates, strengthening the yen and bringing down import prices.
In July, the Bank of Japan hit markets with a surprise rate increase that caused the yen to rapidly appreciate. The move caused a massive sell-off in the stocks of companies that were benefiting from the weakened yen. After facing strong criticism, the Bank of Japan has since proceeded cautiously. Last month, it widely broadcast its plans before raising rates again.
Sayuri Shirai, a professor of economics at Keio University, said the backlash to the bank’s July rate move sent the wrong message at a crucial moment. “The B.O.J. was actually very successful in terms of appreciating the yen,” she said. “Ultimately what is really the priority, stock prices or stopping the yen’s depreciation? I think at this point, it’s obvious.”
