Abstract

The discussion on the Japanese Yen’s historically low depreciation has become the biggest news among enthusiastic tourists. To tourists, this is nothing more than a blessing, but is the depreciation a curse or a blessing to the Japanese economy? 

Overview of Japanese Yen Depreciation 

The Japanese Yen had started its depreciation in 2021. The drop however reached a record low in 2024. In April 2024, Japanese Yen dropped to a historical low of 160 yen per dollar (Al Jazeera, 2024). The drop was not a one-off event. As a matter of fact, the exchange rate recorded a yearly decrease of 12% compared to 2023 (Trading Economics, 2024a). Marketers had nonetheless noticed a slight appreciation in late April. The abrupt appreciation was speculated to be a sale of Japanese Yen by the Bank of Japan (Ministry of Finance Japan, 2024), as the last resort to save the continually low Japanese Yen. Despite the covert government intervention, the effect was not long-lasting and the Japanese Yen continued to decrease in June 2024. 

1. Culprit to Yen depreciation: Enlarging difference between US and Japanese interest rate

In 1999, the Bank of Japan started implementing a zero-interest rate policy. This was a result of the asset price bubble burst in the 1990s when Japan entered into its “Lost Decades” recording a low or negative inflation rate (Feingold, 2024). Nevertheless, this policy evolved into a long-term measure, sustained to stimulate consumption, investment, and inflation. The interest rate in Japan has maintained below 1% in the early 21st century, with the highest interest rate only at 0.5% between 2007-2008. From 2016 to early 2024, the interest rate remains at a historical low of -0.1% for 8 years (Trading Economics, 2024b). The Bank of Japan has maintained a rigid interest rate policy since the late 1990s. Whilst this lowered the turbulence in the market, it also undermined the will to invest with a prolonged low interest rate. On the other hand, the US FED interest rate has been very dynamic. Prior to the COVID outbreak, the FED interest rate ranged between 0.25% to 2.5% from 2015 to 2019. The gap between the FED interest rate and the Japanese interest rate was comparatively minimal. Nevertheless, since 2022, the FED gradually readjusted its interest rate from 0.25% in March 2022 to 5.5% in August 2023. As an act to combat the inflationary pressure on the US economy resulting from the pandemic (Trading Economics, 2024c), the interest rate adjustment notwithstanding enlarged the interest rate difference between the US and Japan to 5%. This immediately prompted the outflow of Japanese capital to the US market, as investors did not predict a sudden increase in domestic interest rates. Despite the paradoxical increase in stock market transactions at times of Yen depreciation, this is an exemplification of the outflow of capital. In January 2024, NISA, a free stock investment program announced the expansion of the limit from 2.4 million yen to 3.6 million annually. The adjustment welcomed a surge in investment volume (Fujita & Riley, 2023a). Yet, investments under the scheme have been under US stocks as a result of the enlarged interest rate difference (Fujita & Riley, 2023b). On the other hand, carry trade was popularised where a high volume of investors purchased Yen in exchange for a higher deposit return in US banks. This combined effect further developed a downward pressure on the Japanese Yen, hindering Japan from escaping the vicious cycle.

2. Increasing foreign investment facilitates the blooming Semi-conductor industry

As aforementioned, the Japanese stock market has fruited positive performance. Thanks to Yen depreciation, companies such as Toyota have set records for revenue and market value. The depreciation does not only benefit domestic firms but international investors, acting as a pull factor to attract foreign investment. For instance, Warren Buffett invested in the Japanese stock market in 2024, which created tremendous synergy for attracting foreign investment (Xie, 2024). Under this favourable climate, combined with governmental support towards investment, a golden opportunity has arisen to facilitate her recent ambition in semi-conductor. Earlier in April, Microsoft announced its plan to invest 2.6 billion USD to increase its cloud computing and AI infrastructure in Japan (Ogura & Liu, 2024). TSMC, the biggest gameplayer in semi-conductor opened its first Japanese plant in Kumamoto on February 24th. A potential investment of more than 20 billion is estimated to be brought through 2027 (Satoh & Cheng, 2024). Consequently, the Yen devaluation greatly reinforced foreign investment and encouraged them to help Japan revive its lost semiconductor production advantage. Introducing more production plants and R&D in Japan under the aid of Japanese depreciation and miscellaneous policies could be a potential escape gate from the Lost Decade in the Japanese economy, helping Japan to revive its lost economic glory. 

3. Export of production line to end users countries: decrease in capital inflow 

Despite that, the harm was significantly higher than the benefits. Utilising the benefit of attractive Japanese exports, an increasing number of Japanese firms migrate their production line directly to their designated countries. In 2022, the ratio of overseas production by overseas affiliates was recorded at 25.8% (Ministry of Economy, Trade and Industry, 2023). Under the increasingly competitive production market in Asia, the production plants have lost their comparative edge staying in Japan. To cut transportation costs, the firms maintained their high-value-added centers in Japan whilst moving their production line to other countries. This however creates a vacuum in capital inflow. At times of low exchange rates, these plants or exporters are unwilling to convert their export surplus into Japanese Yen, and these export profits are unable to be injected back into the Japanese economy (DW, 2024). In the long run, this may exhaust the stability of capital inflow in Japan from Japanese manufacturers and could be detrimental to the Japanese economy. 

4. A double-sided blade: tourism boom

The elephant in the room is the blossoming tourism. The Yen devaluation provides incentives for tourists to visit Japan, benefiting the Japanese economy immensely. As of May 2024, Japan has accommodated 14,641,500 visitors this year, noting a 9.6% year-on-year growth rate compared to 2019 (Japan National Tourism Organisation, 2024). In 2023, the spending of visitors totaled 5.3 trillion yen (35.9 billion USD) (Glass & Nohara, 2024) The tourist bracket is also a diverse one. According to the Japan National Tourism Organisation, in May 2024, 738,800 tourists came from South Korea, 545,400 from China, 466,000 from Taiwan, followed by 247,000 from the US and 217,500 from Hong Kong (Martin, 2024). The growing tourism empowers Japan to be a cultural powerhouse with an increasing attractiveness not only to its Asian counterparts but also to the US. Behind this seemingly positive impact on Japan, the rising tourism nonetheless creates the problem of over-tourism. The increasing number of tourists blocked roads and created hygiene problems in the country. The severity of overtourism has led to government bans in hopes of crowd control. In April 2024, the Kyoto government bans all tourists from entering Gion. Entrance taxes are also introduced in famous tourist spots such as Miyajima Island and Yoshida Trail (Saunders-Wyndham, 2023). The bans have sent out a clear and loud message: over-tourism has become a nuisance to Japanese residents. 

5. Discouraging consumption: rebounded to deflation in the long run 

Japanese Yen depreciation further crushed Japanese enterprises’ confidence in the market, thus disabling a pay rise to boost consumption. The increasing cost of living has counteracted the nominal increase in wages, resulting from increasing import prices and the decrease in the exchange rate. In May, Japan’s real wage fell by 1.4% from a year earlier, declining for 26 months straight (Mainichi, 2024). Domestic consumers simply lack the stimulus to consume. As of May 2024, the yearly Japanese Household Spending averaged nearly 3%. Only in April 2024 had household spending recorded a minimal increase of 0.5% throughout the year (Trading Economics, 2024d) Discouraged domestic consumption may pose a downward pressure on inflation to a greater extent in the long term, as domestic consumption is an integral part of invigorating inflation.  

III. Conclusion

Granted, there is a seemingly positive market response from the increasing investment and export volume, these however are not comparable to other negative economic and social implications. It is therefore imprudent to say the Japanese Yen is a one-sided blessing to the Japanese economy when it in fact signifies structural and prolonged economic obstacles Japan has to face in the near future.