It is also widely accepted as a “safe haven” currency in times of global volatility. In financial markets, the JPY is a “funding currency” that is used in carry trades against higher-yielding currencies such as the Canadian dollar and Norwegian krone.

However, in the past 12 months the yen has depreciated rapidly. As of June 14, the yen has depreciated by 23 percent against US dollar and 14 percent against the rupiah. This is unusual as the yen tends to appreciate against major currencies during a global upheaval. The cause of the depreciation is the increasing interest rate differential between the yen and other currencies and Japan’s ballooning trade deficit due to increased global energy prices.

In response, the Bank of Japan (BoJ) along with the Japanese Ministry of Finance (MOF) and Financial Services Authority (FSA) tried to give signals to markets that the authorities are paying close attention to it and will intervene if necessary.

However, there are limited options for interventions as the global market for the yen is quite deep and it will exhaust Japan’s limited foreign reserves. It seems that the only possible policy option is a tighter monetary policy. But this threatens to jeopardize the fragile economic recovery from COVID-19 and re-anchor consumer expectations of deflation.

In addition, the BoJ is also keen on “inflating away” Japan’s huge debt burden, with most of it denominated in the yen. Therefore, it seems that a weaker yen is here to stay.

For Indonesia, the impact of a permanently weakening yen is significant. If Japan decides to directly intervene in the foreign exchange market, it will involve selling US treasuries, driving global yields up further.

Indonesian yields, as a part of emerging markets, will also increase, driving up government debt-servicing costs. On the trade front, Japan’s consistent trade deficits and weakened yen may mean Japan can no longer finance large investments in portfolio, development assistance and foreign direct investment (FDI) in other countries, including Indonesia.

Japanese companies, a major source of FDI in Indonesia, will be reluctant to invest overseas. The elephant in the room is the possibility of currency war in Asia if the continuing depreciation of the yen causes it to lose the safe haven status and triggers devaluations of other major currencies in the Asian region, particularly the Chinese Renminbi. If this happens, the rupiah will be significantly impacted as it is highly correlated with the Chinese currency.

The government should pay close attention to this situation and make precautionary policies on standby such as diversifying debt issuance to other currencies, deepening the local financial market and hedge loans in foreign currencies such as the Japanese yen.

Meanwhile, the public should also remain alert amid global economic volatility but can take advantage of this and take cheaper, albeit more restricted holidays to Japan.

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The writer is a Master of Public Policy candidate at the Lee Kuan Yew School of Public Policy, Singapore.