A concept photo of currencies and financial market Illustration: VCG

The yen's weakness, already a major market focus, is pushing the Japanese economy into uncharted uncertainty at a pace far exceeding market expectations. 

On Tuesday in New York trade, ‌the yen hit 163.24 per dollar, its weakest point since late 1986, Reuters reported.

This prolonged depreciation has persisted despite the government's repeated attempts to prop up the currency in recent months. Japanese authorities spent 11.73 trillion yen ($71.9 billion) from April 28 to May 27 to defend the currency, according to Japan's Ministry of Finance. Last month, Japan's central bank raised its policy rate from 0.75 percent to 1 percent, the highest level in 31 years. 

But for all the efforts, the yen still tumbled to a four‑decade low, underscoring policy failures and leaving many to wonder what else there is in Japan's macroeconomic toolkit that could support its currency.

Admittedly, external factors are driving the yen's prolonged weakness. Escalating geopolitical tensions worldwide since July have triggered massive safe-haven capital inflows into US dollar assets, substantially strengthening the greenback. Coupled with the persistently wide US-Japan interest rate gap, downward pressure on the yen continues to build. 

Despite Japan's latest rate hike, the Federal Reserve maintained its benchmark interest rate within the range of 3.50 percent to 3.75 percent, creating a spread of approximately 275 basis points. The substantial yield gap keeps encouraging investors to borrow low-cost yen and purchase high-yield dollar assets, which continuously suppresses the Japanese currency's valuation.

Nevertheless, attributing the yen's weakness entirely to external factors would be to ignore Japan's own economic problems. Fiscal fragility has emerged as a critical factor dragging down the yen. The Japanese government debt-to-GDP ratio now stands near 240 percent, the highest of any advanced economy. Any further rate hikes would dramatically increase the government's interest servicing costs and jeopardize fiscal stability, yet any hesitation would leave the yen defenseless against depreciation. This conflict between monetary tightening and fiscal constraints has plunged Japanese authorities into a genuine dilemma.

More alarmingly, there is a disconnect between the Japanese government's policy direction and the real demands of the market. At the end of last year, Japanese Prime Minister Sanae Takaichi, who advocates a "responsible and proactive fiscal policy," pushed the cabinet to approve a draft 18.3 trillion yen supplementary budget for the 2025 fiscal year to fund her massive economic package. 

Last month, the Japanese government unveiled a 370 trillion yen investment road map. The 14-year spending blueprint, which is Japan's largest-ever and longest-term such plan, combines public and private investment in 17 strategic sectors of the economy and includes more than $600 billion for artificial intelligence and semiconductors.

However, this ambitious investment policy approach appears to have done little to ease the strain on businesses, and has instead sparked widespread market concerns. The core pain point of Japan's economy today is the operational crisis brought by persistently high inflation and the plunging yen. Japan's wholesale prices jumped 7.1 percent year-on-year in June. 

The increase in goods prices traded between companies accelerated from a revised 6.6 percent gain in May and was the fastest since March 2023, underscoring mounting inflationary pressure in the resource-poor country, which relies heavily on imports of oil and other petroleum products from the Middle East.

Faced with spiraling living costs, the Takaichi administration not only failed to cut the consumption tax, but has doubled down on expansionary spending, further enlarging the debt pile and fueling market anxiety over long‑term fiscal sustainability - which in turn adds fresh downward pressure on the yen.

On one hand, the government keeps rolling out stimulus measures; on the other hand, companies are under huge pressure amid soaring prices. The severe disconnect between top-level policy design and the demands of the market is continuously intensifying the structural contradictions in the Japanese economy. Japan's economic woes have never been about the sheer size of investment, but about whether the prescription is targeted. When policymakers are obsessed with the grand layout of strategic industries while turning a blind eye to the immediate pains of businesses and ordinary families, the yen may have a painful road ahead.