Yen Crisis: Japan Struggles with Debt, Deflation, and Depreciating Currency

Japan's currency woes continue as the yen approaches the psychologically important 160 mark against the US dollar, despite efforts by the government to prop it up. The country has already spent tens of billions of dollars on interventions and received assistance from the US, but the effects are short-lived.

The problem lies in Japan's economic model, which has been built around cheap money, ultra-low interest rates, massive public debt, and an economy struggling with deflation. When the US and Europe raised interest rates to combat inflation, Japan followed more slowly, creating a gap that encouraged investors to shift capital from yen to higher-yielding assets.

The Bank of Japan has only recently abandoned its negative interest rate policy, setting the rate above zero in March 2024. However, raising interest rates further is complicated by the country's massive debt, which would become even more expensive to service at higher rates.

Mitsuhiro Furusawa, Japan's former chief currency diplomat, believes that interventions alone are not enough and that the Bank of Japan needs to raise interest rates more quickly. The central bank has already raised its key rate to 1%, but markets anticipate another hike in September.