Exchange Rate & Economic Crisis in East Asia Part 1: Japan

The Betrayal of the Weak Yen: Companies Collapse, Interest Rates Held Hostage

Japan’s exchange rate problem has gone far beyond the dimension of simply being “good for travel.” The weak yen policy, which has lasted for over a decade since Abenomics, is now returning as a massive boomerang called ‘Corporate Bankruptcy’ and ‘Loss of Financial Sovereignty,’ choking the life out of the Japanese economy.

1. SME Bankruptcy Crisis: “The Weak Yen is No Longer a Blessing”

In the past, a weak yen was a blessing for export conglomerates, but for domestic demand-driven SMEs, it is now like ‘poison.’ An analysis of the latest data from Teikoku Databank (TDB) and Tokyo Shoko Research (TSR) reveals a chilling correlation between the depreciation of the yen and corporate bankruptcies.

Source: Teikoku Databank (TDB), Tokyo Shoko Research

• The Cost Trap (Cost Push): The number one cause of bankruptcy for Japanese SMEs is not ‘sluggish sales’ but ‘rising costs.’ Essential costs dependent on imports, such as energy, raw materials, and food ingredients, have skyrocketed by 30–40% due to the weak yen.
• Limits of Price Transfer: While a conglomerate like Toyota can reflect cost increases in its prices, a subcontractor or a local bakery loses customers if they raise prices. Consequently, “profitless bankruptcies” (Black-ink Bankruptcies) — where businesses close down despite making sales because “the more they sell, the more they lose” — are erupting. The weak yen is now the main culprit destroying SMEs, the backbone of the Japanese economy.

2. The Trauma of Rate Hikes: The 2024 ‘Black Monday’ and US Pressure

The reason Japan cannot easily raise interest rates, even though it wants to tame inflation, is clear. It is because of the trauma of the ‘Yen Carry Unwind Shock (Black Monday)’ experienced two years ago on August 5, 2024.

Lessons from the Past: The August 2024 Shock

When the Bank of Japan (BOJ) surprisingly raised rates to 0.25%, the ‘Yen Carry Trade’ (funds that borrowed cheap yen to invest in foreign assets) spread across the world was liquidated (repatriated) all at once, causing the Nikkei index to crash 12% in a single day and triggering a simultaneous crash in the US Nasdaq.

• The Government’s ‘Show’: As the situation spiraled out of control, Shinichi Uchida, then Deputy Governor of the BOJ, urgently stepped in to stage a farce, soothing the market by stating, “We will not raise interest rates while financial markets are unstable.” In effect, the central bank declared surrender to the market.

Current Dilemma: Communication with the US is Essential

Since this event, Japan’s monetary policy has effectively become a ‘hostage of the US stock market.’

• The Link: Yen carry funds are one of the key sources of liquidity for US tech stocks (AI, semiconductors). If Japan raises rates without warning, funds could ebb away from the US stock market, triggering a ‘Wall Street-born Financial Crisis.’
• The Reality: Therefore, as of 2026, the Japanese Prime Minister and the BOJ Governor must communicate in advance via hotline with the US Fed and the Treasury Secretary even when raising rates by a mere 0.1%p. The state of lost financial sovereignty — “unable to raise my own country’s rates as I please” — is another reason why the weak yen had to be left unchecked.

3. The Truth About Exports: “Made Money, But Couldn’t Sell Goods”

It is commonly thought that “Weak Yen = Export Jackpot,” but if you tear apart Japan’s export report card for 2026, it reveals a ‘hollow shell.’

Fact Check: Export Value vs. Export Volume

• Export Value: Breaking all-time highs. Since the yen’s value dropped, when dollar-denominated payments are converted to yen, sales and profits on the books have increased tremendously. (Record-breaking operating profits for conglomerates like Toyota).
• Export Volume: Stagnant or decreasing. This is the core issue. Even though the yen has become cheaper, Japanese products are not selling more in the global market.

[Cause: Changes in Industrial Structure]

Japanese manufacturing has already ‘left Japan.’ Over the past 30 years, factories have all been moved overseas (US, China, Southeast Asia).

• Past: Weak Yen => Japanese Price Down => Export Volume Explosion => Domestic Factories Full Operation => Employment/Wages Increase (Trickle-down Effect)
• Current: Weak Yen => Yen Conversion of Overseas Factory Profits Up => Irrelevant to Domestic Production/Employment => Only Corporate HQs get Rich

Conclusion: Even if export values hit record highs, it is merely an ‘exchange rate illusion,’ and the engine running the domestic Japanese economy is turned off. Japan is currently experiencing a “domestic recession masked by an export boom.”

4. The Entry of Sanae Takaichi: “Pouring Oil on the Fire”

To make matters worse, Sanae Takaichi’s economic policy, so-called ‘Sanaenomics,’ is close to a ‘fiscal rampage’ that goes beyond inheriting Abenomics. Her policies are likely to deal a fatal blow to the precarious Japanese economy.

Core of the Policy: The Reality of “New Abenomics”

• Unlocking Fiscal Discipline: She argues for freezing the goal of a primary balance surplus and injecting massive fiscal spending, even if it means government borrowing. It is a dangerous bet to drive economic growth by defining defense, cyber security, and food security as ‘crisis management investments.’
• Refusal to Raise Rates: She has publicly declared that “interest rates must not be raised until wage growth catches up with inflation,” strongly opposing any rate hikes by the Bank of Japan (BOJ). Her stance is that a hasty rate hike would be like pouring cold water on the economy.
• Growth-Oriented Tax Cuts: She opposes corporate tax hikes and prefers tax cut policies to induce companies to divert internal reserves into investment and wages, while remaining cautious about strengthening financial income taxation.

Source: Sanae Takaichi ‘The Path to Protecting Japan’s Future’, LDP Policy Manifesto (2024), Reuters Interview (Sep 2024)

Impact Within Term: The Nightmare of $1 = 170 Yen

• Entrenchment of Super Weak Yen: If Takaichi’s policies are implemented, the BOJ cannot raise rates, and the government will print bonds. This will entrench the interest rate differential with the US, likely triggering a ‘Super Weak Yen’ where the exchange rate soars to the 160~170 yen range. The cost burden on SMEs analyzed earlier will be maximized, and bankruptcies will explode.
• Collapse of the Bond Market (Japan Bond Crisis): Bond issuance that ignores fiscal discipline erodes trust in Japanese Government Bonds (JGBs). If the market begins to doubt the government’s ability to repay, JGB yields could spike (prices crash), leading to a systemic crisis where valuation losses in the financial sector snowball.
• Deepening Polarization (K-Shaped Recovery): Export giants (Toyota, Mitsubishi) will renew record earnings due to the weak yen and government support, but domestic SMEs and ordinary households will suffocate under high inflation.
• Stagflation: Even if money is pumped in, structural population decline and cost-push inflation will overlap, realizing the worst-case scenario where “prices rise, but growth stops.”

Ultimately, Sanae Takaichi’s policies are highly likely to exact a fatal price in the mid-to-long term: ‘Destruction of Currency Value’ and ‘Collapse of Fiscal Integrity.’