Japan Economy Podcast: The True Nature of the Weak Yen. Unraveling the Current Situation with the 'Iceberg Model' Beyond Just Interest Rate Differentials

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Recently, there isn't a day that goes by without hearing the term 'weak yen' in the news. Overseas travel has become out of reach, imported goods at supermarkets have increased in price, and our daily lives are being directly impacted.

Why has the yen become so weak?

Many news reports state that the interest rate differential between Japan and the U.S. is the cause, but in reality, that is only the tip of the iceberg.

In this episode, based on materials analyzed using the AI tool NotebookLM, I will explain the true causes of the weak yen in an easy-to-understand way using the iceberg model.

* The trigger above the surface: Japan-U.S. interest rate differential

First, the most visible cause is the difference in interest rates.

Currently, the U.S. has set interest rates high to curb inflation. On the other hand, Japan continues its ultra-low interest rate policy to support the economy.

Because money has a nature of flowing from places with low interest rates to places with high interest rates, investors are accelerating the movement of selling the yen, which earns no interest, to buy the dollar, which earns high interest.

However, this is merely the trigger visible above the surface. Behind the reason why such a historic weak yen continues, there are deeper structural problems in Japan hidden below the surface.

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* Structural issue below the surface No. 1: Decline in earning power (GDP)

This is where the essential problem lies. The first is that the earning power of the Japanese economy itself is weakening.

Over the past 30 years, while major countries like the United States have continued to grow economically, Japan's GDP (Gross Domestic Product) has remained almost flat. It is truly the lost 30 years.

A country's economic strength is like a report card for its currency. Since no return can be expected from holding the currency of a non-growing country, investment funds from around the world are avoiding Japan and heading toward growing countries.

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* Submerged structure part 2: The burden of fiscal debt

You might think, why doesn't Japan just raise interest rates? However, the massive national debt prevents that.

Japan's ratio of government debt to GDP is at the worst level, standing out as significantly higher compared to the United States and other developed countries.

In the audio commentary, this was described as a giant iron ball chained to the leg, and indeed, because of this iron ball of debt, the Japanese economy is in a state where it cannot step on the brake of raising interest rates to stop the yen's depreciation. This is because if interest rates were raised, the interest payment costs on government bonds would surge, potentially leading to a fiscal collapse.

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* Submerged structure part 3: Real demand for selling yen

Furthermore, our own behavior and the structure of trade are accelerating the yen's depreciation.

First is the trade deficit. Japan, which relies on imports for energy and food, is seeing increased payment amounts due to high resource prices. To pay for imports, we must continue to sell yen and procure dollars.

And then, there is the outflow of individual assets. Through programs like the new NISA, many people are investing in U.S. stocks and global stocks (All Country) in search of growth. Structurally, this also becomes a movement of selling yen to buy dollar assets, strengthening the pressure for a weaker yen.

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Conclusion: The weak yen will not stop without structural reform

As we have seen so far, the current weakness of the yen is not merely a temporary fluctuation in exchange rates.

In addition to the trigger of the interest rate differential between Japan and the U.S., it can be said that this is the result of the complex entanglement and exposure of Japan's structural weaknesses: a decline in earning power beneath the surface, the burden of fiscal policy, and capital flight.

Unless the problems of this entire iceberg are solved, the reality is that it is difficult to significantly change the trend of the weak yen with only superficial interventions. We need to face this harsh reality squarely and think about our future asset protection and ways of working.