Japan's Economy Suffers Record-Setting Currency Depreciation and Shrinking Global Influence

Japan's economy has been making headlines in recent weeks due to concerns about its exchange rate and creditor status. The US Treasury intervened alongside the Bank of Japan to stem the depreciation of the yen, with a modest intervention by the US but a more substantial one by Japan. According to the Japanese Ministry of Finance, foreign exchange intervention was $97 billion from July 30 to August 26, and $74 billion from April 28 to May 27.

The real effective exchange rate of the yen has depreciated by over 60% relative to its level at the end of 1999, and 34% relative to its mid-2020 level. This is a staggering drop, and even taking into account factors such as long-term fundamental changes and monetary policy divergence, it remains hard to explain.

Japan's weight in the global economy has also shrunk significantly over the past 25 years, from 14.7% of global GDP at market exchange rates in 2000 to just 3.8% in 2025. This decline is largely due to its weak per capita growth, shrinking population, and dramatic real depreciation of the yen.

Japan's creditor position has also decreased in relative importance, from 39% of global net creditor positions in 2000 to just 11% by 2025. Its share of global creditor positions as a percentage of US GDP has also declined, from around 20% in 2010 to about 12% by 2025.