[Super Yen Depreciation]③ "If Yen Depreciation Continues, Stagflation"... Warning of 'Japan's Advanced Nation Dropout', Professor Noguchi

Interview with Noguchi Yukio, Hitotsubashi University Emeritus Professor
"Weak Yen is the Result of Accumulated Government Policy Failures"
"If the US-Japan Interest Rate Gap Does Not Narrow, Weak Yen Will Continue"
Wage and Consumption Decline Due to Inflation... Japanese Economy Falls into Stagflation

"The Japanese government, addicted to the weak yen, is ruining the country."

Yukio Noguchi, an eminent scholar in the field of Japanese economics and emeritus professor at Hitotsubashi University, evaluated the weak yen (Yen depreciation) phenomenon in this way. He criticizes the current weak yen situation as the result of accumulated government policy mistakes.

In 2012, when former Prime Minister Shinzo Abe's economic revitalization policy, Abenomics, was implemented, Japanese companies became intoxicated by the so-called "drug-like weak yen effect." Even without striving for technological innovation, companies easily increased profits and stock prices rose thanks to the weak yen.

As a result, the tendency to become complacent with the weak yen deepened, and economic policies leaned toward maintaining the weak yen. Ultimately, the "weak yen that ruins the country" caused Japanese companies to neglect technological innovation, plunging Japan into a quagmire of stagnation.

In a written interview with Asia Economy on the 11th, Professor Noguchi said, "Japan has been pursuing a weak yen policy since around 2002, and after 2013, it further strengthened the weak yen policy through large-scale monetary easing. Because it could not break away from these policies, it failed to respond to the rapid interest rate hikes in the U.S. after 2022."

He pointed out that under such circumstances, the weak yen is bound to continue. Professor Noguchi mentioned that the direct cause of the weak yen is the "interest rate differential between the U.S. and Japan," and for this differential to narrow, Japan must implement a drastic interest rate hike. However, the weakened Japanese economy, due to sluggish domestic demand and trade deficits, is holding back such a strong rate increase, making it difficult.

He diagnosed that the Japanese economy is currently in stagflation (economic stagnation accompanied by rising prices). Although corporate profits and stock prices are rising, prices are increasing due to the weak yen, causing real income to decline and real consumption to decrease. In fact, Japan's real wages, adjusted for inflation, have been declining for 26 consecutive months until May. Household consumption in Japan remains stagnant.

He emphasized that government efforts are crucial for the recovery of the Japanese economy. Professor Noguchi said, "Along with financial normalization, unnecessary subsidies must be stopped." He argued that policies that distribute money to gain popularity or attempts to attract semiconductor factories to Japan by providing subsidies should not be carried out. He also pointed out the need to create an environment for technological innovation, which has been neglected, such as strengthening basic university research and promoting digitalization.

Professor Noguchi is a senior economist and former official of the Japanese Ministry of Finance (formerly the Ministry of the Treasury). He graduated from the Department of Applied Physics at the University of Tokyo, earned a Ph.D. in economics from Yale University in the U.S., and worked at the Ministry of Finance. After holding professorships at several universities including the University of Tokyo and Waseda University, he is currently an emeritus professor at Hitotsubashi University. He is known as "the most actively publishing authority in economics in Japan." He has published over 100 books in various fields beyond economics. In Korea, his 2022 book "The Day Japan Falls Out of the Developed Countries" emphasized that Japan must break away from the wrong weak yen policy and should not persist in popularity-driven money-distributing policies.

Below is a Q&A with Professor Noguchi.

- Recently, the weak yen (Yen depreciation) has intensified. Is this the result of accumulated past policy mistakes?

▲Yes. Japan has been pursuing a weak yen policy since around 2002, and after 2013, it further strengthened the weak yen policy through large-scale monetary easing. Because it could not break away from these policies, it failed to respond to the rapid interest rate hikes in the U.S. after 2022.

- Despite the Bank of Japan's (BOJ) interest rate hike measures in March, the weak yen seems prolonged. Is the recent continuation of the weak yen due to external factors such as delayed U.S. rate cuts, or internal factors like sluggish domestic demand?

▲The direct cause of the weak yen is that the U.S.-Japan interest rate differential is not expected to narrow. However, the reason Japan cannot easily raise rates is because the Japanese economy is weak, so internal factors have a significant influence.

- Why can't the Bank of Japan raise rates drastically?

▲Because the Japanese economy has weakened. For example, due to bankruptcies of zombie companies.

- There are also claims that Japan's rigid prices and wages have worsened the weak yen. Despite improvements in Japan's economy and significant rises in wages and prices this year, why does the weak yen continue?

▲Exchange rates are basically determined by interest rate differentials. Unless the U.S.-Japan interest rate differential is expected to narrow significantly, the weak yen will continue.

- There are also stories that due to the government's large debt, the Bank of Japan cannot easily raise the benchmark interest rate.

▲If long-term interest rates rise, the government's burden of paying interest on bonds increases, raising fiscal pressure. However, due to past low-interest policies reducing interest burdens, fiscal discipline has loosened and unnecessary subsidies have increased. From that perspective, an increase in the government's interest burden could be desirable.

- How long do you expect the weak yen to continue?

▲As long as the U.S.-Japan interest rate differential remains as it is, the possibility of switching to a strong yen is low.

- You argued that digitalization must be promoted to increase Japan's productivity. Why has Japan's digitalization been delayed?

▲Although the Digital Agency was established to promote digitalization, progress has been sluggish. A major reason is that the government itself has not yet moved away from paper and seal-based systems.

- There are reports that increased overseas investment by individual and institutional investors has intensified the weak yen phenomenon.

▲Especially, Japan's new NISA (Nippon Individual Savings Account) system promotes household asset investment overseas. However, it is difficult to see this as a direct cause of the weak yen. In the foreign exchange market, the impact of yen carry trades (borrowing low-interest yen to invest in high-interest countries' assets) is much greater.

- Is the weak yen behind the recent strong performance of the Japanese stock market?

▲The weak yen increases corporate profits, especially benefiting large companies. This is a major factor driving stock prices up.

- What impact is the weak yen having on the Japanese economy?

▲It reduces households' real income through price increases and decreases real consumption. The Japanese economy is in stagflation.

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

▲Media reports often have a negative view of the weak yen (because rising prices make life difficult). Although companies welcome it due to increased profits, such perspectives are rarely reported.

- What should the Japanese government do promptly for economic recovery?

▲It should quickly pursue financial normalization and stop unnecessary subsidies for industries like semiconductors. It should also promote policies for human resource development and basic research, and create an environment for technological innovation.