Editor's note: Zhou Jianjun is an associate research fellow at the CEEC Economic and Trade Cooperation Institute of Ningbo University. The article reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity. 

Recently, persistent yen weakness has raised growing concerns over Japan's economic outlook. Goldman Sachs has raised its forecast for the US dollar against the yen over the next 12 months from 155 yen to 165 yen, making it one of the most bearish yen projections, as per a Bloomberg survey.

Japan's economy is now facing a growing disconnect between traditional economic logic and a new structural reality. The long-held belief that a weaker yen automatically benefits exports is no longer necessarily valid. 

Over the past month, the dollar-yen exchange rate has remained above the 160 level, hovering near historical highs. Traditional trade theory suggests that currency depreciation can reduce the foreign-currency price of a country's exports, stimulate overseas demand and improve trade balances. 

Japan has repeatedly relied on yen depreciation as a policy tool to boost exports and support economic growth. However, this mechanism depends on two key conditions: Firstly, exported goods must be primarily produced domestically; secondly, domestic production capacity must respond quickly to exchange-rate changes. Nowadays, however, Japan no longer fully meets either condition. Despite the yen having depreciated significantly compared with five years ago, Japan has continued to record trade deficits for five consecutive years. The weaker yen has failed to improve the country's trade balance and has instead contributed to persistent external deficits.

Japan's large-scale relocation of manufacturing capacity overseas has rendered the traditional transmission mechanism through which currency depreciation boosts exports ineffective. According to data from the Japan Bank for International Cooperation, Japan's overseas production ratio for manufacturing reached 36.2% in 2024 and is expected to rise to 37.2% by 2027. Meanwhile, the overseas sales ratio has reached a record high of 40%. Compared with the overall average, Japan's leading industries, including automobile manufacturing and electronics, have even higher overseas production ratios. For example, Toyota's overseas production has long accounted for more than half of its total output, while Nissan's overseas production ratio reached 80.8% in 2025. 

When Japanese vehicles are produced at overseas factories and sold in global markets, both production costs and selling prices are denominated in local currencies. As a result, fluctuations in the yen exchange rate have limited direct impact on these operations. Therefore, the benefits of yen depreciation are now mainly concentrated on exports produced in domestic factories. This means the traditional pathway that currency depreciation drives lower export prices, stronger overseas demand and export growth has become increasingly ineffective. A weaker yen alone is unlikely to significantly boost Japan's exports under the country's current industrial structure.

As a resource-importing economy, Japan is particularly vulnerable to rocketing import costs caused by yen depreciation, putting greater operational pressure on domestic enterprises. A weaker yen increases the cost of imports, fueling imported inflation and weighing on economic growth. Keiji Kanda, an economist at the Daiwa Institute of Research, noted that a 10% depreciation of the yen against the US dollar over the past year has reduced Japan's real GDP growth by approximately 0.14 percentage points on a net basis. Over the past year, Japan's import prices have climbed from 151.5 points in June 2025 to 196.6 points in June 2026. 

Rising costs of imported raw materials have directly squeezed corporate profit margins and intensified operational pressures on businesses. In June 2026, the number of corporate bankruptcies in Japan rose to 1,021 from 780 in May, hitting a 10-year high. Instead of generating benefits for domestic enterprises in Japan, yen depreciation has created additional burdens by pushing up import costs for businesses.

Shrinking household purchasing power has fueled a "depreciation-induced downturn" in Japan. According to statistics released by Japan's Ministry of Health, Labour and Welfare, Japan's real wages per capita adjusted for inflation declined by 1.3% in 2025 from the previous year, marking the fourth consecutive annual decline. When the purchasing power of wage earners continues to deteriorate, domestic consumption, a key driver of economic growth, inevitably loses momentum. According to Japan's household expenditure data, household spending declined by 0.4% year on year in May 2026, marking the sixth consecutive month of contraction since December 2025. Yen depreciation has transmitted currency pressures into higher living costs through the import-price channel, weakening households' purchasing power and willingness to consume. 

If prolonged yen weakness continues and Japan struggles to break free from the trend, the economy could fall into a vicious cycle of a "depreciation-induced downturn": A weaker yen drives up prices, rising prices undermine consumption, weaker consumption weighs on economic growth, and slowing growth further increases Japan's reliance on accommodative monetary policies, putting additional downward pressure on the yen.

The fading benefits of yen depreciation reflect a deeper transformation in Japan's industrial competitiveness and offer broader lessons for economies around the world. Goldman Sachs' downward assessment of the yen and increasingly bearish market expectations are, in essence, a reflection of concerns over Japan's structural economic weaknesses. Ageing demographics, the relocation of manufacturing capacity overseas, and insufficient competitiveness in emerging industries have all become more pronounced under the pressure of yen depreciation. When the foundation of an economy's industrial competitiveness weakens, currency depreciation alone cannot reverse declining export momentum. Instead, it may result in a more severe economic recession. 

Japan's experience with yen depreciation demonstrates an important lesson for countries worldwide: Exchange-rate policies cannot substitute for industrial policies, and short-term price competitiveness cannot overcome long-term structural challenges. Only by strengthening domestic manufacturing capabilities and reinforcing the innovation capacity underpinning manufacturing can a country maintain a lasting competitive edge in global competition.

(Cover image via VCG)