With yen weakness continuing even as the Japan-U.S. interest-rate differential narrows, a Diamond Online article examines the third factor said to drive yen weakness through rising Japanese share prices, analyzing capital flows and changes in the balance of payments.
Factors cited as driving continued yen weakness and dollar strength even as the Japan-U.S. interest-rate differential narrows include structural changes in the balance of payments, increased overseas investment through the New NISA in addition to fiscal concerns, and yen selling for currency hedging accompanying the relative rise in Japanese stocks. These factors are examined through capital flows and regression analysis.
The first factor is a change in the composition of the current account, namely the narrowing of the trade surplus alongside an increase in the primary income surplus. As Japanese manufacturers have shifted from an export-centered model to local production, some foreign-currency earnings have been reinvested locally. This has reduced yen buying in the foreign-exchange market, weakening the forces supporting yen appreciation and making stronger foreign currencies and a weaker yen more likely. The second factor is a change in the financial account. Overseas equity investment surged after the launch of the New NISA in 2024. Net purchases without currency-risk hedging have expanded, shifting the foreign-currency demand curve to the right and supporting yen weakness, according to the analysis.