The Japanese yen (JPY) has played a critical role in shaping global trade dynamics, influencing international markets, currency exchange rates, and trade balances across major economies. As the third-most traded currency in the world, after the US dollar (USD) and the euro (EUR), fluctuations in the yen’s value have had a significant impact on Japanese exports, foreign investment flows, and trade relations with Europe. Given that Japan is the EU’s second-largest trading partner in Asia, changes in the yen’s exchange rate can alter the competitive landscape for European industries, particularly in automobiles, technology, and industrial machinery.

By 2024, trade between the EU and Japan surpasses €130 billion annually, with Japanese companies maintaining significant investments in European markets, particularly in Germany, France, and the UK. The Comprehensive Economic Partnership Agreement (EPA) between the EU and Japan, which came into effect in 2019, eliminated 99% of tariffs on goods traded between the two economies, further strengthening trade relations. However, as the yen experiences fluctuations due to Japan’s monetary policies, inflationary pressures, and global economic shifts, European manufacturers must adapt to changes in import prices, competitiveness, and investment decisions.

In recent years, the yen’s depreciation against the euro has raised concerns among European policymakers, as a weaker yen makes Japanese exports cheaper and more competitive in European markets, while simultaneously making European exports to Japan more expensive. This case study examines how the Japanese yen’s exchange rate influences EU-Japan trade, the impact of currency volatility on European industries, and the broader economic implications of yen fluctuations on global trade stability.

How Yen Depreciation Has Impacted EU-Japan Trade

The value of the Japanese yen has fluctuated significantly over the past decade, driven by Japan’s ultra-loose monetary policy, low interest rates, and government stimulus programs. In 2022, the yen fell to a 32-year low against the US dollar, dropping to ¥151 per USD, leading to widespread economic consequences. Against the euro, the yen depreciated by 18% between 2021 and 2023, increasing Japan’s trade surplus with the EU and making Japanese exports more attractive to European consumers.

For Japan, yen depreciation has been beneficial for major exporting industries, particularly in automobiles, consumer electronics, and industrial machinery. Companies such as Toyota, Sony, and Mitsubishi have gained a competitive edge in European markets, as their products have become cheaper relative to European alternatives. In 2023, Japanese car exports to the EU increased by 12%, while the market share of European automakers like Volkswagen, BMW, and Renault declined in certain segments.

However, while a weaker yen boosts Japan’s export-driven economy, it has created challenges for European manufacturers, especially in sectors competing directly with Japanese firms. European automobile, electronics, and machinery producers have faced higher competition, forcing them to cut prices, absorb currency losses, or shift production strategies. For example, Germany’s auto industry, which relies heavily on exports to Asia, saw a 7% decline in sales to Japan in 2023 due to higher vehicle prices caused by exchange rate fluctuations.

Additionally, European companies that rely on Japanese imports for raw materials and components have experienced increased costs, as yen depreciation has made it more expensive for Japanese firms to invest in Europe. This has particularly affected industries such as semiconductors, robotics, and high-tech manufacturing, where Japan remains a key supplier.

Monetary Policy, Exchange Rate Volatility, and Trade Balance Shifts

Japan’s central bank, the Bank of Japan (BoJ), has maintained an ultra-loose monetary policy for over a decade, keeping interest rates at -0.1% since 2016 to stimulate economic growth and prevent deflation. However, this approach has also contributed to yen weakness, as global investors have moved capital toward higher-yielding assets in the US and Europe, leading to capital outflows from Japan.

Conversely, the European Central Bank (ECB) has raised interest rates aggressively to combat inflation, strengthening the euro against the yen and further widening the trade imbalance. As a result, European exporters have struggled to remain competitive in Japanese markets, while Japan has benefited from cheaper exports to Europe.

The growing trade imbalance has led to policy concerns in both economies, with European officials calling for coordinated exchange rate interventions to stabilize currency volatility. However, Japan has historically resisted direct currency interventions, preferring to allow market forces to dictate exchange rates. The result has been a continued competitive advantage for Japanese exports, raising questions about how Europe should respond to ongoing yen depreciation.

The Future of EU-Japan Trade Relations Amid Currency Fluctuations

As global economic conditions evolve, the long-term impact of the yen’s fluctuations on EU-Japan trade remains uncertain. If the yen continues to weaken, Japanese firms could further expand their market share in Europe, while European exporters face increasing difficulties in Japan. However, several factors could alter this trajectory:

1. Policy Adjustments by the Bank of Japan – If Japan decides to increase interest rates, the yen could appreciate, restoring trade balance and easing pressure on European manufacturers. However, such a move could slow Japan’s economic growth and reduce its export competitiveness.

2. Supply Chain Realignments – European manufacturers may seek alternative supply chains to reduce dependency on Japanese imports, potentially shifting toward South Korea, Taiwan, or domestic production to offset currency-related cost increases.

3. Strengthened Trade Agreements – The EU and Japan could negotiate further trade provisions to ensure balanced economic relations, particularly in high-tech industries where both economies have significant stakes.

4. Diversification of Currency Reserves – Some European firms and central banks may adjust currency reserves and trade settlement mechanisms to hedge against yen volatility, reducing exposure to exchange rate risks.

While trade between the EU and Japan remains strong, ongoing currency fluctuations will continue to shape competitive dynamics, requiring policy coordination and strategic adjustments from businesses on both sides.