The Japanese yen could weaken beyond 170 against the U.S. dollar before eventually recovering as the government’s economic stimulus strategy begins to generate stronger growth and improve the country’s fiscal position, according to RSM US Chief Economist Joe Brusuelas.
Brusuelas said the yen’s prolonged weakness is not simply the result of short-term market speculation but the consequence of years of ultra-loose monetary policy, aggressive fiscal support and structural economic challenges that continue to constrain the Bank of Japan’s ability to tighten policy aggressively.
Speaking in Tokyo, Brusuelas said Prime Minister Sanae Takaichi’s administration is effectively prioritizing economic expansion and industrial competitiveness over a stronger currency in the near term, with policymakers viewing a weaker yen as a tool to boost exports and support long-term growth.
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“I think what policymakers want is a yen that is supportive of external growth via the trade channel,” Brusuelas said.
This follows investors’ growing questions about whether Japanese authorities can prevent another sharp depreciation of the currency despite repeated warnings and previous market interventions. The dollar has climbed back above the psychologically important 160-yen level, erasing much of the impact of Japan’s record currency intervention earlier this year.
According to Brusuelas, the roots of the yen’s weakness stretch back several years, when Japanese authorities chose to flood financial markets with liquidity and rely heavily on the Bank of Japan to absorb government bond issuance rather than accept higher unemployment or weaker economic growth.
That policy mix has helped keep borrowing costs exceptionally low but has also widened the interest rate gap with the United States, encouraging investors to borrow cheaply in yen and invest in higher-yielding assets elsewhere, placing persistent downward pressure on Japan’s currency.
Brusuelas believes the yen’s eventual recovery depends largely on whether Takaichi’s economic programme succeeds in lifting productivity, expanding the tax base and reducing Japan’s enormous public debt burden. The government’s new economic blueprint shifts fiscal policy away from annual primary budget surplus targets toward improving the country’s debt-to-GDP ratio over time, reflecting its emphasis on sustained economic expansion rather than rapid fiscal consolidation.
If stronger growth translates into higher tax revenues and a gradual decline in the debt burden, investor confidence in Japan’s long-term fiscal outlook could improve, providing support for the yen.
Until then, however, Brusuelas expects policymakers to tolerate a weaker currency because it supports export competitiveness and corporate earnings. Although he sees the yen weakening toward 170 per dollar and potentially beyond before reversing course, Brusuelas said he considers the currency’s fair value to be around 157-158 per dollar.
That implies current exchange rates are already significantly weaker than economic fundamentals would justify.
The Ministry of Finance has previously demonstrated its willingness to intervene in currency markets, spending record amounts in April and May after the dollar breached the 160-yen threshold. However, the effect proved temporary, with the currency once again trading above that level.
Brusuelas believes authorities may have to intervene again if speculative trading becomes excessive.
“There’s going to have to be intervention to discipline excessive speculation,” he said.
Even so, he argued that intervention alone cannot reverse the yen’s broader trend because the underlying drivers remain intact. In his view, the Bank of Japan also faces severe limitations in how aggressively it can raise interest rates.
While higher rates would typically support a currency by attracting capital inflows, Brusuelas warned that Japan cannot tighten policy too quickly without undermining its broader economic objectives.
China’s slowing economy is pushing Beijing to rely more heavily on exports, intensifying competitive pressures across Asia. Against that backdrop, Brusuelas said raising Japanese interest rates much above 1.5% over the next six to nine months would risk weakening domestic investment and hurting the government’s growth strategy.
He said the central bank must therefore proceed cautiously when communicating future policy moves.
“They’re going to have to proceed cautiously here because you do not want what is a mild speculative attack to turn a wild global orgy of everybody shorting the yen all at once,” he said.
The statement backs growing market expectations that the BOJ will continue its gradual approach to monetary normalization even as inflation remains above its long-term target.
AI Investment Offers Long-Term Support
Brusuelas also pointed to artificial intelligence as one of the most promising pillars of Japan’s long-term economic strategy.
Prime Minister Takaichi has identified AI as a national priority, with the government seeking to strengthen Japan’s position in advanced semiconductor manufacturing and AI infrastructure.
Rather than competing directly with the United States in developing frontier AI models, Brusuelas said Japan is better positioned to benefit as a critical supplier within the global semiconductor ecosystem.
He expects Japanese companies to play an increasingly important role in supplying materials, manufacturing equipment and specialized technologies to industry leaders such as Nvidia, Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung Electronics.
Global spending on AI infrastructure is expected to reach roughly $5 trillion over the next four years, creating substantial opportunities for Japan’s industrial sector.
That investment cycle could eventually strengthen Japan’s economy, improve productivity, and support higher tax revenues, providing the foundation for a stronger yen over the longer term.
For now, however, Brusuelas believes that Japanese policymakers appear willing to accept continued currency weakness if it helps achieve those broader economic objectives, even if it means the yen temporarily falls to levels not seen in modern history.