How Japan’s Currency Crisis Is Transforming Trade and Tourism

Author: Cindy Xue, Graphics: Yarden Pri-Noy

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The Japanese Yen is Depreciating

A trip to Japan has never been more affordable, but at what cost to Japan’s economy? Reaching an all-time low since 1990, the Japanese Yen has become incredibly weak against the US dollar. Travelers flock to Japan to shop to their hearts’ content. Whether they’re restocking their favorite Japanese products, splurging on luxury goods, or enjoying Japanese landmarks at a bargain, tourists agree that Japan is the place to go. 

On July 10, 2024, 1 US dollar was worth 161.5 Japanese Yen, emphasizing a peak of the Yen’s decline. But what caused the Yen to decline so dramatically? To understand this phenomenon, let’s look into currency depreciation as a whole, and how this impacts the Japanese economy and tourism.

Why is the Yen so Weak?

In order to grasp why the Japanese Yen has become so weak, we first must understand the difference between currency depreciation and appreciation. Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. The main causes of depreciation are interest rate differences, political instability, or risk aversion among investors. As a result of currency deprecation, countries see their export activities increase as their goods and services become cheaper to buy for foreigners.

On the other hand, currency appreciation is an increase in the value of one currency to another in forex markets. Just like depreciation, many causes of appreciation include interest rates, changes in monetary and fiscal policies, trade balances, and business cycles. Appreciation is often used as a tool to boost a country’s economy.

In Japan’s case, they have been utilizing monetary policy, a set of tools used by a nation’s central bank to control the overall money supply and promote economic growth. However, Japan’s commitment to extremely low interest rates to help stimulate their economy has just continued to depreciate the Yen, making it less attractive to global investors.

Now, let’s take a closer look at the Japanese Yen. The value of a country’s currency relies on its performance in the foreign exchange market. Currency depreciation occurs when the value of one currency decreases relative to another form of currency, which is caused by supply and demand shifts in the foreign exchange market. For the Yen, the primary factor of its depreciation is Japan’s historically low interest rates compared to those of the United States.As of Fall 2024, the US Federal Reserve’s interest rate is set between 5.25% and 5.5%; much higher in comparison to the Bank of Japan’s rate between 0% and 0.1%. Investors tend to chase higher interest rates, so the higher interest rates in the US attract more investors to invest in US opportunities with higher returns on investments (ROIs). Due to this difference in interest rates, many investors sell the Yen to buy US dollars. Thus, the demand for more US dollars increases while the Yen declines in value, leading to more investors selling the Yen, perpetuating an on-going cycle.

Tourism Boom in Japan

One extreme benefit of the depreciating Yen is that Japan’s tourism has skyrocketed. The weak currency has made traveling to Japan extremely affordable and attractive to foreigners. In 2024, Japan hit a record amount of 30 million tourists just from January to October, becoming a must-go destination for international tourists.

Additionally, once arriving in Japan, tourists see that their money is worth more due to the drastic depreciation of the Yen. This allows them to spend on nice hotels, fine dining, or shopping trips. Everything in Japan, especially luxury goods,  are perceived as much more affordable. 

One of the main pull factors for tourists is Japan’s tax-free shopping. Tax-free shopping is when the purchaser is exempt from paying consumption tax, taxes on goods and services borne by consumers who pay higher retail prices for those products. Many businesses in Japan—such as the main airports, department stores, electronics shops, shopping malls, drug stores, and Japanese Brand stores—offer tax exemptions. When going on a shopping trip, look for the ‘tax-free’ sign at store locations to guarantee a money-saving shopping experience.

However, keep in mind that the tax exemption only applies to items for personal use and consumption and not for business or resale. Additionally, the items must be brought out of the country before being used in order to be exempted from consumption taxes. But you need not worry since Japanese stores make this process even simpler by packaging items in a consumables bag sealed with a sticker to show if the package has been opened or not.

In addition to the tax-free incentive, another factor drawing in foreigners is the cheaper luxury goods. Known as Japan’s luxury district, Ginza, Tokyo has seen a significant increase in foreign shoppers. Thanks to the weak Yen, luxury clothes and handbags are available at a significant discount in Japan. For instance, Louis Vuitton’s popular Alma BB handbag typically goes for $2,050, but as of June 2024 in Japan, the bag would have been available for $1,725. Despite the profit loss for luxury giants like LVMH and Richemont, tourists are queuing up at the numerous luxury boutiques that line the Ginza district and walking away with bags of luxury goods. 

Much of the luxury shopping in Japan is fueled by Chinese tourists, as the price differences for luxury goods between mainland China and Japan have reached an all-time high in 2024. According to data from the Japan National Tourism Organization, more than 1.3 million mainland Chinese travelers visited Japan in the first quarter, up 826% year-over-year. The influx of Chinese shoppers especially helps to explain how Louis Vuitton’s sales grew 32 percent in Japan during the first quarter, as the hashtag “LV shops are filled with Chinese” dominated Weibo trending topics, gathering over 8.7 million clicks on the platform. 

Aside from the close geographical proximity of China to Japan, Chinese shoppers can save up to 25 percent after a tax refund when buying goods in Japan. For instance, the Chanel Classic Flap handbag is 10,640 renminbi, or $1,472, cheaper in Japan compared to the Mainland; the Miu Miu Aventura handbag is 9,204 renminbi, or $1,273, less; and a Van Cleef & Arpels Alhambra bracelet is 10,303 renminbi, or $1,426, less.

Popular cities like Tokyo, Kyoto, and Osaka have experienced significant economic boosts as tourist numbers have continued to increase throughout 2024.

Exports and How They Help Japan

Aside from tourism, the weakened Yen has led to a stark increase in Japanese exports. In October 2024, Japanese exports rose to a three-month high of 9426.66 JPY Billion, up from 9038.20 JPY Billion in September. From cars to electronics, all sorts of Japanese goods have become cheaper and more affordable for buyers worldwide, which has led to an increase in global demand for Japanese products.

Toyota, Japan’s leading automotive manufacturer, has especially benefited from this trend. Toyota reported a 1.7% increase in net profits to 1.33 trillion yen ($8.9 billion) in their first quarter, with their operating profits increasing 16.7% to 1.31 trillion yen.

Sony also saw high earnings last year due to the weaker yen and favorable exchange rates. The company’s consolidated sales increased 3% year-on-year to 2,905.6 billion yen in Q2 FY2024, and the CEO Hiroki Totoki has also noted that the yen’s weakness has helped to boost takings for the company.

The Downside: Increased Costs of Imports

However, despite the increase in exports, the weak Yen has largely increased the cost of imports. The weakened Yen has increased the cost of imported food, raw materials, and energy which Japanese residents greatly rely on.

Japan has long had a heavy dependence on imports, as the country relies on imports for 62% of its total food consumption in terms of calories, and also depends on imported food for 42% of its total food production value. This has resulted in higher prices for imported food and food products as a whole. In just June 2024, the prices for 614 food items have increased, including confectionery and dairy products.

Beyond food, energy costs have also significantly increased since 2020, severely affecting smaller companies that target the domestic market. Mizuho Securities Vice President Miyoko Nakashuma noted, “For smaller companies, many of whom work with domestic demand, a weaker yen means higher costs, putting pressure on business performance.”

The trend has created a financial strain on Japanese households, as domestic families are now estimated to pay around 106,000 yen more in living costs in 2024, compared to the previous year. This financial strain has created a huge burden especially for working-class families living paycheck to paycheck, and part-time workers.

Japan’s Monetary Policy: Then vs Now

Japanese policymakers are now scrambling to help fix the Yen’s depreciation. The government and the Bank of Japan are looking at two main strategies: buying yen on the foreign exchange market and raising interest rates.Regarding foreign exchange intervention, the Japanese government has engaged in many actions to help support the yen as authorities have spent 9.8 trillion yen on interventions in April and May 2024. An additional 5.53 trillion yen (approximately $36.8 billion USD) was used for yen-buying interventions between June 27 and July 29, 2024. All of these actions are conducted under the authority of the Minister of Finance which utilizes the Bank of Japan as an executing agent

Additionally, as of March 2024, the Bank of Japan lifted its negative interest rate policy for the first time in 17 years. The Negative Interest Rate Policy (NIRP) was initially implemented in 2016 by the Bank of Japan as a part of an aggressive monetary plan to combat deflation, where the short-term interest rate was set to -0.1%. In July 2024, the Bank of Japan raised their interest rate to around 0.25%, which is the highest level since 2008. These are substantial changes from the Bank of Japan’s previous dedication to ultra-low interest rates.

However, despite these strategies, the yen continues to remain relatively weak. As of November 2024, the Yen was still flailing against the U.S. dollar with the USD/JPY exchange rate rising to almost 154. However, the expected gradual correction of the Yen’s depreciation seems to have made modest gains since April 2025, when the yen rapidly rose by 9% after the Trump Administration’s sweeping “Liberation Day” tariff announcement.

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Take-Home Points

• The Japanese Yen has reached an all-time low since 1990, with 1 USD = 161.5 JPY in July 2024.
• Low Japanese interest rates compared to those of the U.S. have made the Yen less attractive to investors.
• Japan’s monetary policy, which focuses on ultra-low interest rates, has worsened the Yen’s value.
• The weak Yen has led to a tourism boom in Japan, with Japan reaching a record of 30 million tourists in 2024.
• Tourists largely benefit from Japan’s tax-free shopping and discounted luxury goods.
• Chinese travelers serve as major players in Japan’s increase in tourists as they are largely drawn by the significant bargains on luxury goods.
• The weak Yen has increased Japanese exports, benefiting companies like Toyota and Sony.
• Import costs have increased, leading to higher living costs for Japanese households.
• The Japanese government has intervened by buying more Yen in the foreign exchange market and raising the interest rate to 0.25%.