Japan’s yen pain is Southeast Asia’s economic gain

The Japanese yen’s collapse through mid-2026 has become one of the most consequential disruptions to hit global financial markets in decades. The currency has slid past 162 yen to the US dollar, its weakest level since 1986 — a sharp reversal from its 1995 peak of about 80 yen per dollar. Japan’s real effective exchange rate (REER) has fallen to its lowest point in more than 50 years, a sign that the yen’s decline reflects deep structural forces rather than a temporary market swing. The fallout has reached far beyond Japan’s shares, redrawing economic fortunes across Southeast Asia. The region has emerged as a net beneficiary of the yen’s slide — from lower debt-servicing costs on yen-denominated loans to a surge in Japanese investment and tourism — even as the same forces expose it to the risk of a sudden reversal should the yen’s decades-long carry trade unwind. Several factors have driven the sharp depreciation. Chief among them is the persistent interest-rate gap between Japan and other advanced economies, particularly the United States. The Bank of Japan ended its negative interest-rate policy in 2024 and gradually raised its benchmark rate to 1% by June 2026, but investors viewed the tightening as too slow and too cautious. Meanwhile, the US Federal Reserve kept its policy rate at around 3.5%-3.75% to contain stubborn inflation, widening yield differentials and drawing capital out of Japan and into higher-yielding US assets. External shocks have compounded the pressure. War between the US, Israel and Iran pushed global crude oil prices over US$100 for a while. Because Japan imports roughly 95% of its crude oil from Gulf producers, soaring energy costs sharply increased demand for US dollars, adding further downward pressure on the yen. Investor concerns over Japan’s fiscal outlook also intensified after Prime Minister Sanae Takaichi unveiled a $2.3 trillion public-private investment initiative without clearly explaining how it would be financed. With government debt already approaching 240% of GDP, markets increasingly worried that fiscal expansion could overwhelm monetary policy and undermine confidence in the currency. Uneven outcomes The yen’s prolonged weakness has created starkly uneven outcomes within Japan. Large multinational corporations have posted windfall gains as overseas earnings translate into far higher yen revenue. Japan’s tourism boom has provided another lift, drawing record numbers of foreign visitors enjoying the cheap yen while boosting service-sector profits. For households and smaller businesses, the story has been markedly different. Imported inflation has pushed up living costs and eroded purchasing power, even after the strongest annual wage settlements in decades; real wages have continued to fall because inflation has consistently outpaced nominal pay gains. Smaller wholesalers and import-dependent firms, unable to pass rising costs on to consumers, have faced mounting financial strain — a factor behind the sharp rise in weak-yen-related bankruptcies in the first half of 2026. This domestic contrast stands in sharp relief against the relative resilience of Southeast Asian currencies. The Singapore dollar, Malaysian ringgit, Vietnamese dong and even the Indonesian rupiah have all strengthened significantly against the yen, reflecting more credible monetary management and healthier fiscal fundamentals across much of the region. Unlike Japan, several ASEAN central banks have responded to inflation with greater flexibility. Singapore’s exchange-rate-based monetary framework, for example, has let the Monetary Authority of Singapore contain imported inflation without relying solely on interest rates. Most ASEAN governments also carry considerably lower public debt burdens than Japan, thereby preserving policy space and reinforcing investor confidence. Reshaped regional economy The yen’s depreciation is reshaping the regional economy through multiple channels, including sovereign debt, foreign investment and cross-border financial flows. For developing Asian economies carrying significant yen-denominated liabilities — particularly Japanese official development assistance loans and Samurai bonds — the weaker currency has delivered an unexpected fiscal dividend. As the yen loses value against local currencies, both principal repayments and interest obligations shrink in domestic-currency terms. Malaysia, for instance, is expected to save substantially when its 200 billion yen Samurai bond, issued in 2019, matures later this decade. Vietnam has likewise benefited from lower repayment costs on Japan-backed infrastructure financing, freeing up fiscal room for investment in green development. Indonesia also stands to gain. With economic growth projected to stay close to 5% in 2026, the country’s macroeconomic position is comparatively strong. Long-term repayment obligations for Japanese-funded projects, including the Jakarta MRT expansion, have become less burdensome, easing fiscal pressure on both the national government and the Jakarta provincial administration. Indonesia’s exports to Japan, meanwhile, are dominated by commodities such as liquefied natural gas and coal, which are priced primarily in US dollars — so export revenue has stayed largely insulated from swings in the yen. The picture is less favorable elsewhere. In the Philippines, a weaker yen lowers repayment costs for major infrastructure projects such as the Metro Manila Subway, but it also erodes the purchasing power of remittances sent home by Filipino workers in Japan. Converted into pesos, those earnings buy less than before, weakening household consumption at a time when families are already grappling with elevated domestic inflation. Carry-trade risk Despite the yen’s sharp depreciation, Japan’s structural challenges — a shrinking population and chronic labor shortages — continue to push manufacturers to relocate production to Southeast Asia. Japanese firms have steadily expanded their overseas manufacturing footprint, with offshore production accounting for more than 36% of output in fiscal 2024. That trend suggests ASEAN remains the region’s preferred long-term manufacturing base, regardless of short-term currency swings. At the same time, even as Japanese companies continue to invest abroad, the weak yen has made domestic Japanese assets more attractive to foreign buyers. Singapore’s sovereign wealth fund, GIC, has been among the most active, channeling capital into premium hotels, logistics facilities and commercial real estate in Tokyo and Osaka. The historically strong Singapore dollar has significantly boosted the purchasing power of regional investors seeking long-term assets in Japan. Overall, ASEAN has emerged as a net beneficiary of the yen’s depreciation. Lower debt-servicing costs, continued Japanese foreign direct investment and opportunities to acquire undervalued assets have all strengthened the region’s economic position. But these gains shouldn’t breed complacency. The greatest threat is a sudden reversal in global markets triggered by an unwinding of the yen carry trade. For years, investors have borrowed cheaply in yen to finance higher-yielding investments worldwide, a strategy that has flourished because Japan’s ultra-low interest rates and weak currency kept borrowing costs exceptionally low. That equilibrium could change abruptly if the Bank of Japan speeds up monetary tightening toward a neutral policy rate of around 2%, or if Japan’s Ministry of Finance launches a large-scale foreign-exchange intervention that rapidly strengthens the yen. Either scenario would force investors to unwind leveraged positions, buy yen to repay loans and sell off riskier assets across global markets. Such a synchronized reversal would extend well beyond Japan. Emerging-market equities, bonds and currencies, including those across ASEAN, could see sharp capital outflows as investors scramble for liquidity. Past episodes of carry-trade unwinding show that these adjustments can spread rapidly through global financial markets, amplifying volatility far beyond the original shock. As such, regional policymakers should treat today’s favorable conditions as a chance to strengthen financial defenses, not as a guarantee of lasting stability. Central banks, including Bank Indonesia, should reinforce macroprudential safeguards, build up foreign-exchange liquidity buffers and deepen bilateral currency-swap arrangements under the ASEAN+3 framework. These mechanisms would serve as an important first line of defense if global liquidity conditions were to tighten abruptly. The weak yen has undoubtedly delivered tangible economic gains for much of Southeast Asia, from lower external debt burdens to sustained investment inflows to cheaper holidays in Japan. But those benefits depend on an unusually benign financial environment. If the forces behind the weak-yen era reverse, the same economies now enjoying its advantages could quickly face renewed financial turbulence. For ASEAN, then, the weakening yen should be seen not simply as an economic windfall but as a reminder that currency movements can redistribute opportunity and risk with remarkable speed. The region’s true resilience will depend less on the yen’s direction than on the strength of its own institutions, prudent macroeconomic management and its readiness for the next shift in global capital flows. Ronny P Sasmita is senior international affairs analyst at Indonesia Strategic and Economic Action Institution, a Jakarta-based think tank. He holds a PhD from the University of Tokyo.