The stronger yen should be good for Japan

English original of article published in Japanese by Nikkei Business on April 21st

We may be about to debate one of the most regular but hard to answer questions about the Japanese economy: is a strong yen good for corporate Japan, and for the economy, or is it harmful?

Since the start of 2025, the yen has recovered some of its value against the US dollar. It is never safe to make predictions about currency movements, but what we can say is that the commencement of President Donald Trump’s trade war against all countries, including America’s closest security allies such as Japan, means that companies now need to take seriously the possibility that the yen could strengthen a lot further against the dollar.

Some economists even wonder if it might rise as high as Y110, a level last seen in the summer of 2021. That would represent roughly a 30% rise compared with the low point of Y158 to the dollar which was seen in early January. [By April 30th it was Y143, nearly a 10% appreciation.]

Exchange rates are always unpredictable because they are a market outcome, not a policy tool for government, and that outcome depends on the changing balance between a wide range of forces. The case for considering the risk of a substantial rise in the yen arises from the fact that the balance of those forces has just been given a violent push by Trump’s announcement that he is returning America’s typical tariff rate on goods imports to a level last seen three-quarters of a century ago.

Some economists expected Trump’s tariff announcements to lead to a rise in the value of the US dollar, not a fall, as markets adjust to the new terms of trade and a potential fall in America’s trade deficit. However, so far the opposite has been happening. This is most likely because this is not the only force that the tariffs have unleashed.

Three other forces are at work: extreme policy uncertainty as President Trump has changed his plans rapidly from day to day, and as he has used import taxes as a bargaining tool rather than as a stable form of economic strategy; second, the growing prospect of a US recession, as corporate investment has slowed and federal spending has been cut; and third, the growing likelihood that as a result of that economic slowdown the US Federal Reserve will have to reduce interest rates.

From the standpoint of the Japanese yen, the prospect of a US recession and lower US interest rates makes it likely that the interest-rate differential between yen and dollar securities will shift in the yen’s favour. The uncertainty over global economic prospects will mean that the Bank of Japan might continue to be cautious in raising its own interest rates, even though the latest Tankan survey showed inflationary pressure to be increasing, but if the Fed’s rates fall that could be enough to tip the balance in the yen’s favour.

Let us, then, hypothesize that over the coming months the yen does rise further in value against the US dollar. What would this mean for the Japanese economy and for corporate Japan?

In this scenario, much would depend on how rapidly such a rise might occur. The Japanese government cannot control the value of the yen, but it would certainly prefer any change to be gradual, as this allows time for companies and households to adjust to the change. That is why the finance ministry sometimes attempts to intervene in foreign exchange markets in the hope of stabilising them.

If we assume a steady but gradual change over one or two years can be achieved, one important effect will be to reduce price inflation as imported goods will cost less. This will help make the Bank of Japan’s job easier while also helping the one-quarter of Japanese who live on pensions. Meanwhile, wage earners could see their incomes rise faster than inflation for the first time in several years, boosting domestic consumption.

Another positive effect would be to make overseas acquisitions and investments by Japanese companies more affordable in yen terms. Many businesses know that if they want to grow they need to do so abroad rather than in Japan and a stronger yen would make this easier.

On the other side of the equation, a stronger yen would hurt the profitability of exporting companies, at a time when those profits will also be hurt by America’s import taxes and potentially by a US recession. The question for those companies would be whether stronger household demand in Japan and a greater ability to invest abroad in order to relocate production and markets can counteract that blow to their profits.

On balance, a stronger yen looks likely to be positive for Japan, if it happens gradually rather than suddenly. Let us see.