Japan earned a record net income of 41.5903 trillion yen (about 378 trillion won) last year from overseas factories and stocks and bonds, but the yen fell to as weak as 163.24 per dollar as of the 21st, its lowest level in about 40 years. Foreign-exchange experts said the long-held rule that the currency of a country that earns a lot strengthens no longer applies to Japan, as the flow of dollars earned by Japanese corporations overseas being brought home and converted into yen has thinned.
As of 1 p.m. on the 23rd, the yen was hovering in the mid-162-per-dollar range on the Tokyo foreign-exchange market. After the yen-dollar rate, which had climbed to a record high in 40 years on the 21st (a weaker yen), saw a slight rebound on the 22nd following reports that the Central Bank, the Bank of Japan (BOJ), could raise rates faster than the market expected. Even so, it remains stuck at its weakest levels since 1986. During trading on the 23rd, the won-yen rate was around 899 won per 100 yen, breaking below the 900-won level. As higher oil prices from the Middle East and concerns over fiscal expansion by Sanae Takaichi's government drag the yen down, funding streams within Japan's balance of payments that would support the yen are gradually drying up.
The yen strengthens only when there are many orders to sell dollars and buy yen. For example, if a Japanese automaker sells cars in the United States and earns $100, to bring that money back to Japan to pay wages and taxes, it has to sell $100 and buy yen. At that point, buy orders for yen appear in the foreign-exchange market, pushing the yen up. Conversely, if the U.S. subsidiary or affiliate of the Japanese automaker uses that money directly to expand a local plant, the fact that the company earned money is the same, but no transaction to buy yen occurs.
Looking at the latest balance of payments released by the Japan Ministry of Finance on the 9th, Japan recorded a surplus of 3.9683 trillion yen (about 36 trillion won) from transactions with overseas in May. The report card that adds up all the money a country earns and spends overseas is called the current account, and in May Japan had virtually no money left over from selling goods or providing services. As of May, the goods transaction showed a surplus of 6.9 billion yen, and travel, transport and digital service transactions showed a deficit of 10.3 billion yen, for a combined deficit of 3.4 billion yen. Instead, profits, dividends and interest received from overseas factories and foreign stocks and bonds reached 4.2756 trillion yen, accounting for 107.7% of the overall surplus. The nearly 4 trillion yen that Japan netted in May is interpreted to mean the gains came not from export proceeds from selling goods, but from returns on assets already piled up overseas.
Money accumulated overseas no longer comes back to Japan by half as it did before. In the past, Japan exported cars and electronics made in domestic factories and brought the dollars home to pay wages, parts costs and taxes. Now, local subsidiaries in North America, Europe and Asia manufacture and sell locally, and pay wages and expansion costs in local currency. With more overseas acquisitions of corporations and increased resource and financial investments, there are now many places to put earned money back to work overseas. According to Japan Ministry of Finance tabulations, on a full-year basis last year, of 26.0585 trillion yen in income from overseas subsidiaries, 11.3425 trillion yen (43.5%) was not transferred to Japan and remained locally.
Japan's unusually low interest rates compared with global standards are also an obstacle to capital inflows. The current Japanese policy rate is 1%, while the United States is 3.50–3.75%. Simply leaving funds in dollars yields far more interest income. Minami Takeshi, chief economist at the Norinchukin Research Institute, told Reuters, "As overseas investments generate higher revenue than domestic ones, corporations have little reason to bring money home."
Japan's government is actively intervening in the foreign-exchange market to defend the yen. According to Bloomberg, the Japan Ministry of Finance bought yen between Apr. 28 and May 27 using a monthly record 11.7349 trillion yen (about $73.5 billion). Even so, the yen is weakening by the day compared with before the government stepped in.
Finance Minister Katayama Satsuki said on the 22nd, "We will take appropriate and bold measures whenever necessary." The Takaichi government urged pension funds and households to increase investment in Japanese assets. Citing experts, Bloomberg noted, "Within the Bank of Japan as well, there is caution that the yen's decline could trigger inflation," and "there is a current that does not rule out a rate hike faster than the market expects." Tanaka Junpei, chief investment strategist at Pictet Asset Management's Japan unit, said, "As concerns about fiscal expansion grow, more people see limits to stopping the yen's slide through foreign-exchange intervention alone."