Amidst high inflation in most parts of the world, with rising wages and prices creating a spiral of service sector price increases, Tokyo's Ginza district is now offering bento boxes (lunch boxes) for just 320 yen. When the author lived and worked in Japan from 1999 to 2004, a bento box in Ginza would cost at least 600 to 700 yen. At that time, the exchange rate of the yen to the dollar was around 101-103; today it is 157-159.

Since 2022, the yen has been the most devalued among all credible currencies. Tourists are flocking to Japan, making tourism a pillar for the Japanese economy as it emerges from the so-called "lost three decades." At the same time, a weaker yen has driven up the prices of imported goods, stoking inflation and pushing Japanese consumers to spend rather than save. The weak yen not only improves the trade balance but also attracts significant foreign investment into Japan.

The Nikkei Index has finally broken through a three-decade-long record, and the stock market is booming. Overseas investors are gaining not only investment returns but also exchange rate gains. Beyond securities investments, foreign direct investments are also pouring in, with the notable example of a semiconductor factory being established in Kumamoto Prefecture. It seems that yen depreciation brings numerous benefits to the Japanese economy.

However, the Japanese government has recently been intervening in the foreign exchange market, even stepping in twice to buy yen to curb one-sided speculative trades. Reports suggest that the Japanese government spent nine trillion yen in these interventions, an unusually large amount, but the effectiveness of these interventions has been limited.

Given the benefits of a weak yen, why does Japan seek to stop further depreciation? Firstly, Japan is a resource-poor country that relies on imports for energy, raw materials, and food. A steep yen depreciation significantly increases upstream costs, raising concerns of uncontrollable inflation. The direct consequence of runaway inflation is the erosion of consumers' purchasing power, increased living costs, and social pressure. Secondly, many Japanese companies, facing domestic demand, may struggle to pass on the increased energy and raw material costs to consumers, squeezing their already thin profit margins and dampening future investment enthusiasm.

Depreciation of the yen and stimulating domestic demand are somewhat contradictory. While a booming tourism industry is beneficial, excessive prosperity brings its own problems. Major city transportation is crowded with tourists, better restaurants face seating and price constraints, and the high costs of hotels and airfare deter locals. Increasingly, Japanese citizens are calling for a tourist tax to balance tourist benefits with their own interests.

Before intervening in the forex market, the Japanese government publicly urged the U.S. not to support yen short-selling. The U.S. government responded that Japan should not intervene in the forex market, a rare public confrontation. Japan is concerned about uncontrollable inflation, which could erode real incomes and threaten the nascent consumer recovery, while the U.S. needs a strong dollar to attract more foreign capital to support dollar assets and government deficits.

Since the 1980s, Japan has undertaken multiple forex market interventions, which have generally been unsuccessful unless the U.S. and other industrial countries took coordinated action. The author believes that the Japanese government does not dislike the direction of yen depreciation but is concerned about its speed. Yen depreciation has been a cornerstone for Japan’s economic recovery over the past decade, beneficial for alleviating deflationary mindsets and improving export company profits. However, this process must be controlled to avoid impacting domestic consumption and provoking voter dissatisfaction.