Current-account deficit shift keeps yen weak; intervention alone falls short
2026-07-02
Structural shift underpins weaker yen, raising need to rethink coordination
Toward a mature creditor nation
A Cabinet Office report released in 2020, Japan Economy 2019-2020: Toward sustainable growth in an era of population decline, said Japan was approaching the stage of a mature creditor nation. This refers to a country whose current account is supported by a surplus in income balance from overseas assets even as its trade and services balance falls into deficit. In foreign exchange terms, it implies a structure that is prone to a weaker yen.
Japan's trade and services balance moved into deficit in 2019. The working-age population has continued to decline since peaking in 1995, and more than 60% of manufacturers now produce overseas. These structural changes in the economy have led to real-yen selling that is supporting historically weak levels for the currency.
Changing safe-haven yen buying
In the past, markets generally subscribed to the idea of 'safe-haven yen buying' in times of crisis, but now, Dai Chikamori of Mizuho Bank sees a shift to a structure in which 'safe-haven yen selling is more likely to occur.' As Japan has become a trade deficit country, the yen is less likely to be bought as a safe asset even when geopolitical risks rise. Even as tensions over Iran worsened, funds flowed into the dollar, the currency of the hegemon, and the yen did not strengthen.
Speculative funds are also increasing dollar buying. As of June 23, dollar net long positions against the major eight currencies had risen to their highest level since January 2025. Real-demand yen selling, combined with speculative yen selling, has kept the market tilted toward a weaker yen and a stronger dollar.
The government and the Bank of Japan carried out large-scale yen-buying interventions in 2022, 2024 and 2026 to counter speculative moves. However, as long as real-demand yen selling persists in the background, downward pressure on the yen is likely to reemerge. To fundamentally reverse a historic period of yen weakness, foreign exchange intervention alone has its limits.
1995 yen correction
More than 30 years ago, in 1995, Japan faced a historic surge in the yen that pushed the dollar below 80 yen. At the time, exports of cars and electronics widened the trade surplus, while speculative buying of the yen accelerated its rise.
The turning point was a correction strategy based on international coordination. At a meeting of finance ministers and central bank governors from the Group of Seven nations, held after the yen broke into the 80-yen range in April that year, participants voiced concern over developments in the foreign exchange market and shared the view that it would be desirable to reverse the fluctuations in an orderly manner. In July, Japan and the United States carried out the so-called Tanabata intervention, jointly selling yen and buying dollars, and in September the BOJ decided on a sharp 0.50 percentage point rate cut. The policy rate entered the 0% range for the first time.
Through a response combining international agreement, exchange-rate policy and monetary policy, the yen rate recovered to below 100 yen per dollar in September, ending the phase of yen strength in the 80-yen range. The trade surplus also remained at about 10 trillion yen a year afterward, but the strong yen ended without eliminating the surplus.
Broad strategy needed
It will take a long time to turn the current trade deficit into a surplus and make it a lasting condition. It is also unrealistic to quickly increase the working-age population or bring manufacturing back to Japan.
The immediate focus is a comprehensive strategy to curb historically weak yen levels. Even after repeated intervention in 2022, 2024 and 2026, selling pressure on the yen could strengthen again as time passes. A response that combines efforts to engage the international community with coordination between the government and the BOJ is essential.
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