The factors behind the depreciation of the yen: Why Japan needs a policy shift

Abstract This article analyses the factors underlying the recent depreciation of the yen. Using an autoregressive distributed lag (ARDL) model, I find that approximately half of the decline in the yen's exchange rate against the dollar from the end of 2020 to mid‐2024 can be attributed to portfolio balance effects. Income disparity and interest rate differentials between the US and Japan have also contributed to the yen's weakening. This suggests the need for a shift in Japan's economic policy, which should focus on expanding domestic demand and easing pressure on the yen's depreciation.