🌍 Can Japan save the yen?

Your Insider’s briefing:
— Can Japan save the yen?
— Go work in Tuvalu
— World’s biggest defence HQ is now in…

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“This year’s profit alone will exceed the cumulative profit generated over the 40 years since Samsung entered the semiconductor business.”

That’s a reported quote from a senior Samsung official, just before the firm reveals an expected 18x jump in Q2 profits (YoY). Samsung shares have actually fallen on the profit news as investors see their expectations met rather than surpassed.

Today we’re looking at one of Japan’s historic foes. It’s big, destructive, and the authorities are unable to stop its advance. We’re talking of course, about Godzilla the weak yen.

How weak? Depends which aperture you use, but we’re talking 3.6% off vs the dollar in six months 🥱, 11% down in a year 🤔, or 35% down in three years 😮. If you want to use Japan’s real effective exchange rate (REER), Japan’s yen has halved in 40 years 😵.

Even in nominal terms, the yen just hit its lowest level against the USD since 1986, which is back when humanity was still blowing on Nintendo cartridges to make Zelda work.

And that’s despite the Bank of Japan burning a cool ~$70B in market intervention this year alone, all in an attempt to tap the yen’s brakes.

So… what’s going on?

Just like Godzilla, the weak yen’s origin story has multiple layers, including three cyclical.

The first reflects the gap between lower interest rates in Japan and higher rates in the US. Like moths to a flame, foreign capital follows those sweet sweet returns.

The second cyclical driver is around higher oil prices (90% of Japan’s imports are via the Middle East), with Japan having to spend more USD (sell more yen) to quench its thirst. 

The third is a little paradoxical: sure, Japan’s recent stock rally has lured foreign investors, but many actually hedge their currency risk by selling yen forward, weakening it further.

There are also, however, three deeper, interrelated structural drivers behind the weak yen.

The first is the gradual loss of Japan’s manufacturing edge either to offshoring or rivals like China — so a weak yen no longer supercharges Japan’s exports the same way.

The second structural driver is Japan’s demographic drag, with a shrinking and ageing workforce capping long-term growth and reducing the international appeal of yen assets.

And the third is Japan’s massive fiscal overhang, occasionally rattling investors around the longer-term sustainability of Tokyo’s debt.

So… what’s this all mean for Japan?

Sure, it creates all kinds of winners, like anyone now “exporting” a lower-cost Japanese experience to every 30-year-old Westerner suffering early-onset mid-life crisis.

It also creates all kinds of losers, like that poor ol’ Takamatsu retiree starting to feel like their trip to the grocery store is some kind of financial Takeshi’s Castle.

But we’re also interested in the complications this all creates for Tokyo:

First, the Bank of Japan gets left walking a tight-rope of keeping rates high enough to stabilise the yen, but without torpedoing growth or spiking Tokyo’s interest costs.

Second, Tokyo knows it needs to defuse Japan’s demographic time bomb, and it’s taken baby steps to (say) encourage more women into the workforce, raise the retirement age, and even — whisper it — invite more immigrants. But that all risks clashing head-on with some of Japan’s deeply conservative instincts.

And third, Japan’s fiscal overhang makes it all harder — longer-term competitiveness would mean spending more on R&D, manufacturing subsidies, and tech investment, precisely the kinds of outlays that increasingly clash with Tokyo’s existing debt burden, and force (or delay) uncomfortable choices on taxes and entitlements.

For now, Takaichi’s play seems clearer — her new $2.3T package investing in tech and strategic sectors is an attempt to escape Japan’s lower-growth trap longer term. But in the meantime, it means even more borrowing, and even more yen pain. Godzilla stumbles on.

Japan’s legendary ex-leader, the late Shinzo Abe, actively embraced a weaker yen via his Abenomics playbook: his theory was always that…

Japan’s legendary ex-leader, the late Shinzo Abe, actively embraced a weaker yen via his Abenomics playbook. We say ‘legendary’ because he was the architect of modern Japan’s longest streak of political stability while also restoring Tokyo’s geopolitical heft. And his theory was always that a weaker currency would help jumpstart Japan’s giant corporations while importing enough inflation to break Japan out of its deflationary trap.

So then… where’d Abe go wrong on the yen? We’d argue three of his key assumptions ended up colliding with a changing world:

First, he always assumed corporate windfalls from a weaker yen would flow into regular pockets. But instead, haunted by past memories and a shrinking population, corporate Japan just built up a colossal ~$1.8T mountain of cash, plus a ~$2.1T pile of offshore investments. And that inflation just ate into folks’ savings rather than halt the deflation.

Second, Abe always assumed low rates and cheap money would help fund the next era of local growth across Japan. Instead, global markets turned it into a loophole known as the carry trade, using cheap yen to buy higher-yielding assets abroad, and effectively turning Japan’s currency into Wall Street’s credit card.

And third, Abe always assumed Japan would retain its safe haven status — for decades Tokyo could print cash with the comfort of knowing investors treated the yen like a bunker. But more recent crises suggest this crown is cracking — the yen has kept dropping through the Iran war, merely leaving Japan with a bigger energy bill.

The net result — for all Abe’s brilliance — is Japan got the weaker yen, but not (or at least not yet) the virtuous cycle. And while it’s tempting for outsiders to look on and think oh that’s sad for Japan, history might end up revealing that Japan today is merely us tomorrow: know any others wrestling with productivity, debt, and demographics?

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Barely days after reaching another IMF agreement to help balance the books, Egypt went ahead and opened a sprawling new defence mega-complex that’s even bigger than the Pentagon, and which Cairo naturally therefore named… The Octagon.

Because nothing says “we’re committed to fiscal prudence” quite like spending $60B on a defence HQ that’s bigger than Manhattan, in a new capital boldly named… New Capital.

Egypt insists the new capital is key to easing pressure on Cairo, and if you’ve been to busy Cairo you’ll understand the rationale. It also argues The Octagon is mostly self-funded by the military itself, though when your military controls a ~quarter of the economy and sells everything from mineral water and pasta through to cleaning products and holidays, “self-funding” the world’s largest defence HQ starts to take on a whole new meaning.

Yesterday’s poll: Why do you think Iran's supreme leader missed the funeral?

🛡️ Security reasons (23%)
💉 He's dead / out of action (68%)
⚡ Power dynamics (8%)
✍️ Other (write in!) (1%)

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