Yen Struggles Amid Slowing Economy and Widening Trade Deficit

The yen has failed to recover from its slump despite a joint US-Japan action last month. Analysts say that Japan's economy slowed in Q2, missing forecasts on household and business spending, but robust underlying momentum and persistent price pressures are likely to prompt the BOJ into action next month.

Japan's imports reached an all-time high in July due to high oil prices and inflation, while exports hit record levels driven by a weak yen and AI-driven chip boom. However, the country is still running a trade deficit of over $600 billion on the month, which is likely to widen as crude prices surge amid geopolitical uncertainty.

Analysts caution that higher wholesale prices and import bills may soon trickle down to consumers, threatening retail spending later this year despite government subsidies to soften the blow. The yen's fair value is estimated at 97 per dollar using the PPP measure, but carry trades driven by low borrowing costs in Japan continue to push the currency lower.

Michael Metcalfe, global head of macro strategy at State Street, noted that 'the market can't price the yen so far away from fundamentals for a long time.' The BOJ's lagging response to inflation has led some traders to argue that raising interest rates alone cannot save the currency and may even highlight distress in Japan with sovereign debt near 200% of GDP.