The slowdown in Japan's economic growth has led to a rapid outflow of capital, exacerbating the devaluation pressure on the yen. Japan achieved a current account surplus of ¥8.97 trillion (approximately $57.5 billion) in the third quarter of this year; however, this surplus was offset by a significant outflow of direct and securities investments, further pushing down the yen. In September, the yen rose to a 14-month high against the dollar as traders unwound yen-funded carry trades, but it has since fallen by about 10% cumulatively.
Analysts point out that the interest rate differential between Japan and the United States is one of the major reasons for the yen's continued weakness. Especially considering that the new U.S. President Trump might implement policies that stimulate inflation, the Federal Reserve is expected to maintain higher interest rates, putting further pressure on the yen. However, the structural issues in Japan's trade and investment flows are also significant factors leading to the yen's devaluation. The outflow of direct and securities investments offsets the current account surplus, thus limiting the potential recovery space for the yen. Despite Japan achieving a basic income surplus of ¥12.2 trillion in the third quarter, mainly from returns on overseas investments, the expansion of the trade deficit continues to intensify the yen's devaluation pressure, with yen being sold off to meet the demand for foreign currencies.
Compared to other major economies, Japan's ability to attract foreign investment is relatively low. Data from the International Monetary Fund (IMF) shows that as of the end of June this year, Japan's foreign direct investment accounted for only 8.3% of its GDP, ranking lowest among the world's 20 largest economies. In contrast, the ratio is 99% for the UK and 57% for the U.S. The data indicates that since 1996, direct investment outflow from Japan has almost always exceeded inflow each quarter, suggesting that foreign investors face high entry barriers in the Japanese market.
Analysts believe that Japan's complex business environment, low growth rate, and relatively small market size further dampen the willingness of foreign investors to invest. Estimates from the Bank of Japan show that Japan's potential economic growth has almost stagnated over the past 20 years, which has also heightened the trend of capital outflow. With the slowdown of Japan's economic growth and the widening global interest rate gap, the outlook for the yen remains under pressure.
