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25-year weak yen obsession is blowing up on Tokyo

Currency traders betting on a rebound in the yen would be wise to look past the officials currently in charge and listen instead to policy veterans who know better.

Over the last year as the yen was recording three-decade lows, officials such as Finance Minister Shunichi Suzuki, top currency diplomat Masato Kanda and Bank of Japan Governor Kazuo Ueda pinned the currency’s plunge on Federal Reserve decisions in Washington – the idea being that the yen is a victim of the Japan-US yield gap.

This is bunk, as Hiroshi Watanabe, former vice minister of finance for international affairs, tells Nikkei Asia. Even if Tokyo intervenes again, there’s little scope for the yen to rally from 159 now past, say, 150 to the US dollar, he says.

The odds favor an ever-weaker yen in the weeks ahead. The reason: Tokyo’s 25-year-old weak-yen strategy is blowing up on Asia’s second-biggest economy in real time, leaving the currency on a downward path.

“The scale of yen depreciation in recent years is startling,” says Robin Brooks, economist at the Brookings Institution. “The yen has fallen more in real effective terms than the Turkish lira, which long held the distinction of being the weakest currency across the major markets. Indeed, since the end-2019 – since just before Covid hit – only one currency, the Egyptian pound, has fallen more than the yen in real terms.”

Brooks adds that, “not surprisingly, the scale of this depreciation has sparked debate on its drivers and how much further it can extend.” On some level, he explains, “yen weakness stems from Japan’s very high debt, which forces the bank to cap long-term government bond yields via open-ended bond buying.”

Ultimately, Brooks concludes, “Japan is a cautionary tale about letting debt