By TENGKU NOOR SHAMSIAH TENGKU ABDULLAH
KUALA LUMPUR, Aug 7 — The unprecedented US-Japan effort to arrest the yen’s fall may have delivered a powerful short-term rebound, but it cannot repair the structural weaknesses undermining confidence in Japan’s economy, according to Juwai IQI Chief Global Economist Shan Saeed.
The yen had weakened to about ¥163.65 against the US dollar in late July, its lowest level since 1986 before intervention drove the exchange rate back towards the ¥155–¥159 range.
“The yen’s collapse is not an export renaissance,” Shan told TNS News. “It is the market’s verdict on an architecture distorted by financial repression, fiscal dominance and weak productivity.”
Japan reportedly spent about ¥8.45 trillion, or approximately US$54 billion, intervening in the currency market over two days. The United States also took the unusual step of buying yen, reportedly by selling euros through the Federal Reserve Bank of New York.
The operation represented Washington’s first direct intervention in support of the yen since 1998. The United States last intervened in the yen market in 2011, but that coordinated operation was intended to weaken, not strengthen the Japanese currency following the earthquake and tsunami.
The intervention pushed the dollar down from above ¥163 to around ¥155–¥159, delivering one of the yen’s strongest rallies in years.
“Intervention buys time; it cannot manufacture credibility or erase an adverse yield differential,” Shan said.
BOJ remains behind the curve
For Shan, the Bank of Japan remains behind the inflation curve.
On July 31, the BOJ voted 8–1 to maintain its policy rate at around 1.0%. Board member Hajime Takata dissented, proposing an immediate increase to 1.25%.
Japan’s national consumer inflation stood at 1.7% in June, while Tokyo’s July inflation reading—widely regarded as a leading indicator of national price trends—was 2.0%.
Shan argued that monetary conditions therefore remained too accommodative.
“With inflation running ahead of the policy rate, real policy remains permissive,” he said. “Negative real rates subsidise leverage, perpetuate the yen carry trade and impair price discovery. Currency weakness then transfers purchasing power from households towards exporters and owners of foreign assets.”
A persistently wide interest-rate gap between Japan and the United States has encouraged investors to borrow cheaply in yen and invest in higher-yielding foreign assets. That carry trade has added pressure on the Japanese currency.
Shan described the BOJ’s predicament as an unstable policy trilemma.
“The BOJ is trying to contain sovereign funding costs, preserve Japanese government bond-market liquidity and restore exchange-rate credibility,” he said. “It cannot optimise all three indefinitely.”
Without faster monetary-policy normalisation, he added, intervention could serve only as a circuit breaker—not a durable solution.
An unforgiving domestic equation
Japan’s underlying economic and demographic pressures further complicate its policy choices.
Official preliminary estimates placed the country’s population at approximately 122.93 million on July 1. Meanwhile, real household consumption among households with two or more people declined 0.4% year on year in May.
Japan also carries one of the world’s largest public-debt burdens. The International Monetary Fund estimates gross general government debt at about 204% of gross domestic product in 2026, while Japan’s Finance Ministry projects the combined long-term debt of its central and local governments at approximately 194% of GDP by the end of the fiscal year.
As existing debt is refinanced at higher yields, the government’s interest burden is expected to rise substantially—further narrowing the room for fiscal manoeuvre.
Demographic pressures are equally severe. About 30% of Japan’s population is aged 65 or older. McKinsey research shows that labour-force participation among people aged between 50 and 65 has risen to 84%, from 73% in 1997.
For Shan, those figures describe a workforce that is ageing in place rather than expanding sufficiently to sustain stronger long-term growth.
The yen’s weakness, he argued, therefore reflects more than relative valuation or short-term market positioning. It also points to doubts about Japan’s broader policy trajectory.
No Plaza Accord 2.0
“Japan’s post-war model has lost efficacy,” Shan said. “Prolonged monetary accommodation has weakened capital discipline without producing sufficient real growth.”
He rejected suggestions that the latest US-Japan cooperation could become a modern version of the 1985 Plaza Accord, under which the Group of Five economies coordinated action to weaken an overvalued US dollar.
“The Plaza Accord was a multilateral bargain, not a standing insurance policy for Tokyo,” he said. “Tactical cooperation is not Plaza Accord 2.0.”
Shan expects the yen to experience further sharp rallies, particularly when markets anticipate intervention or an unwinding of carry trades. However, he remains bearish about Japan’s medium-term economic framework.
“Expect violent yen rallies, but remain bearish on Japan’s medium-term macro architecture,” he said.
“Unless Tokyo restores positive real-rate credibility, imposes fiscal discipline and engineers a productivity revolution, investors should kiss the old Japanese economic model goodbye.”
- TNS NEWS