GoKawiilThis past week's US-Japan collaboration on shoring up the Japanese yen leads to the question—what's wrong? Why is the Japanese yen getting so weak, and is there something wrong with the Japanese economy?
Japan has one of the largest debt-to-GDP ratios and is particularly disadvantaged due to the Iran War driving up oil and energy prices. At the same time, its technology industry has a lot to offer, but not without tradeoffs. Here, we're exploring some of those tradeoffs: interest rates versus debt, investing in the future while managing concerns about overspending, and managing national ambition alongside consumer price concerns.
Japan's economic challenges
A full-blown overview of Japan's economy is beyond the scope of our writing. Instead, we'll list some of the larger challenges and initiatives tied to Japan's economic development before exploring the tradeoffs.
Japan has one of the largest debt-to-GDP burdens in the world, at over 200%. Prior to last week's US-Japan currency intervention, its currency lost over 10% of its value this year. Prime Minister Sanae Takaichi is working on a growth-oriented agenda, but facing challenges as inflation hovers at 1.7% and peaked at 3.7% in May 2025 . Worse still, a 1.7% inflation rate hides the challenges faced by Japanese consumers: food prices have increased 3.2%, with fish and seafood growing at 6.9% this past year . While fuel and energy prices have been flat, this is only because they are actively subsidized by the government.
Against the inflation backdrop, Prime Minister Takaichi's approval rating dropped from 69% in June to 57% in July. Specific criticisms target her attempts at fighting cost-of-living price rises, with 71% disapproving of her administration's strategy . The challenges are partly out of Japan's control: global energy prices have skyrocketed, leading to significant increases for energy imports.
This is the context that Japan's government finds itself in, and many of its options come with painful pros and cons.
Tradeoff: raise interest rates to fight inflation, and hurt consumers
Japan's official interest rate is set to 1%, which was reaffirmed in the July 30/31 Bank of Japan meeting .
Higher interest rates should help reduce inflation and encourage more saving. More importantly, higher interest rates reduce the benefit of the carry trade, where investors borrow in Japanese yen (paying the relatively low local interest rate), sell the yen by converting it to other currencies, and then buying international assets. This enables investors to benefit from low Japanese interest rates while arbitraging higher rates and returns elsewhere. Since such investors sell yen, they drive the price of the yen down, which increases costs of other imports, like energy and food.
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