[Super Yen]⑥ "Will exceed 165 yen within a year"... Warning from Japanese Economist

Daisuke Garakama, Chief Economist at Mizuho Bank Japan
Not Just Due to Yen Depreciation and Interest Rate Gap... Trade and Service Deficits Also Impact
"Yen-Dollar Exchange Rate Will Ultimately Exceed 165 Yen Within the Next Year"

Daisuke Garakama, Chief Economist at Mizuho Bank Japan, stated that the yen-dollar exchange rate is expected to "ultimately exceed 165 yen" over the next year. While a combination of U.S. interest rate cuts and Bank of Japan (BOJ) rate hikes could lead to yen appreciation below 150 yen, if former President Donald Trump wins the U.S. presidential election, the U.S. wage and price situation is likely to strengthen, potentially causing yen depreciation to resume.

In a written interview with Asia Economy on the 9th, Economist Garakama pointed out that the main reasons for the prolonged yen depreciation are "one, the U.S.-Japan interest rate differential, and two, changes in supply and demand conditions." He said, "Financial markets tend to discuss only the former, but since 2022, I have doubted such explanations," adding, "I do not think the 50-yen depreciation from 110 yen to 160 yen can be explained by interest rate differentials alone."

The change in supply and demand conditions he mentioned refers to Japan's large trade deficit. The trade balance represents the difference between exports and imports based on customs clearance, and Japan has been running a trade deficit due to the impact of soaring import prices caused by yen depreciation. He explained, "Japan recorded its largest-ever trade deficit in 2022 and the fourth-largest in history in 2023. In addition, there has been a significant increase in platform usage fees paid to GAFAM (Google, Apple, Facebook, Amazon, Microsoft), resulting in a large global service balance deficit, which has contributed to yen depreciation."

He is a leading exchange rate expert in Japan. Known as an analyst who explains not only short-term exchange rate forecasts but also the medium- to long-term causes of yen fluctuations. After graduating from Keio University’s Faculty of Economics in 2004, he joined the Japan External Trade Organization (JETRO), worked at the Japan Economic Research Center, was dispatched to the European Commission’s Directorate-General for Economic and Financial Affairs, and has been with Mizuho Bank since 2008, working in the foreign exchange market economic and financial analysis team. In June 2023, he also published a Korean translation of "The Future of the Yen."

The following is a Q&A with Economist Garakama.

- What are the main reasons for the prolonged yen depreciation?

▲ There are two reasons. One is the U.S.-Japan interest rate differential, and the other is changes in supply and demand conditions. Financial markets tend to discuss only the former. However, since 2022, I have doubted such explanations. I do not think the 50-yen depreciation from 110 yen to 160 yen can be explained by interest rate differentials alone. Japan recorded its largest-ever trade deficit in 2022 and the fourth-largest in history in 2023. In addition, there is a large global service deficit, influenced significantly by increased platform usage fees paid to GAFAM.

- Despite significant wage and price increases in Japan this year, why does yen depreciation continue?

▲ It is due to changes in the supply and demand structure caused by the disappearance of trade surpluses. Recently, the digital deficit has overlapped, increasing the outflow of foreign currency from Japan.

- Has the ‘yen carry trade’ fueled yen depreciation?

▲ The ‘yen carry trade’ refers to selling yen and buying dollars based on interest rate differentials. Of course, this is one of the main causes of yen depreciation. But focusing only on this can miss the essence. In fact, even when the U.S. Federal Reserve (Fed) stops raising rates and signals rate cuts, yen depreciation not only continues but accelerates. The lesson Japan should learn from this yen depreciation phase is that ‘interest rate differentials alone cannot explain yen depreciation.’

- How long will yen depreciation last?

▲ Since the shift to a floating exchange rate system in 1973, the yen has mostly experienced a history of appreciation. However, the history of yen depreciation began around 2011-2012 when trade surpluses disappeared. Yen appreciation could occur with Fed rate cuts. But just as there were phases of yen depreciation during the history of yen appreciation, future yen appreciation phases should be understood as brief pauses within the history of yen depreciation.

- What is your forecast for the yen-dollar exchange rate this year and next year?

▲ Over the next year, the rate may approach around 150 yen at times, but I expect it to ultimately exceed 165 yen. There is a possibility of yen appreciation below 150 yen if U.S. rate cuts and BOJ rate hikes coincide. However, if former President Trump is elected, the U.S. wage and price situation is likely to strengthen, potentially causing yen depreciation to resume.

- The number of individual and institutional investors investing overseas has increased. Is this related to the intensification of yen depreciation?

▲ Following Prime Minister Fumio Kishida’s declaration of Japan as a nation for asset management, a new tax-exempt small investment savings system (NISA) expanding the tax-exempt investment limit started in January 2024. Half a year has passed since then, and overseas securities investments in investment trusts have already doubled compared to last year’s performance. This undoubtedly affects yen depreciation.

- There are talks that due to Japan’s large government debt, the BOJ cannot easily raise its benchmark interest rate.

▲ In fact, many speculative investors selling yen seem to believe that the BOJ "cannot raise rates anyway." No one explicitly denies or confirms this, but it is difficult to deny the fact.

- The Japanese stock market has shown a very positive trend recently. How much has yen depreciation influenced this?

▲ Looking at the global stock markets over the past year, countries like Argentina, Egypt, and Turkey have seen very high gains. These are all countries experiencing significant currency depreciation. While Japan cannot be equated with these countries, the evidence suggests that inflation is causing currency depreciation and pushing up stock indices. This is theoretically an expected development.

- What are the pros and cons of yen depreciation for the Japanese economy?

▲ The advantage is that it boosts profits for large export manufacturing companies, especially in the automobile sector. The disadvantage is the worsening real income environment for domestic industries and households. Ideally, profits from export manufacturing would spread to domestic industries and households, leading to a conclusion that yen depreciation is positive for Japan. Unfortunately, this transmission is not occurring in Japan. Currently, the disadvantages outweigh the advantages. The government and ruling party’s approval ratings have actually declined because of this.

- What is the general public opinion in Japan about yen depreciation?

▲ The view is overwhelmingly negative. Many people are suffering from a decline in real wages.