Challenges and Opportunities for Japan in 2024

In a recent speech at the Japan National Press Club, former Vice Finance Minister Eisuke Sakakibara, renowned as “Mr. Yen,” emphasised the importance of a strong yen for the nation’s interest. As Japan approaches 2024, it faces two significant challenges that could impact the yen’s standing on the global stage.

Losing the World’s Largest Creditor Status

Japan’s current position as the world’s largest creditor is under threat, with Germany closing in on its net external assets. Calculations based on International Monetary Fund forecasts indicate that Japan’s net external assets, standing at $3.1 trillion in 2022, maybe surpassed by Germany’s $3.5 trillion by the end of 2024. This potential shift raises concerns as Japan increasingly relies on overseas investments to offset declining earnings from exports.

Structural Changes in Current Account Balance with China

The recent yen depreciation to 4.7749 yuan per 100 yen on the Shanghai foreign exchange market underscores a structural change in Japan’s current account balance with China. The deficit, reaching about 4.5 trillion yen ($30 billion) from the first quarter of 2022 to the second quarter of 2023, poses a threat to Japan’s overall current account surplus. Factors contributing to this imbalance include a decrease in Japanese exports, particularly semiconductor-related products, and a slowdown in investment revenues, influenced by tighter controls implemented by Chinese President Xi Jinping and China’s economic slowdown.

Yen’s Substantial Weakening and Global Comparisons

Emin Yurumazu, an economist, draws attention to the yen’s satirical resemblance to Turkey’s national currency. From March 2020 to October 2023, there was a significant 29% decline in the yen’s real effective exchange rate, indicating substantial weakening. Comparatively, the Turkish lira experienced a 21% drop, with an annual inflation rate exceeding 60%. Toru Sasaki, chief strategist at the Fukuoka Financial Group, emphasises that despite Japan’s status as the world’s largest creditor, its gross government debt surpasses that of Turkey, signifying a nuanced challenge for the yen.

Japanese Yen hit high while Dollar dropped from recent peak

Outflow Trends and the 2024 Yen Problem

Bank of Japan statistics reveal a consistent trend of net outflows overseas through securities investment trusts during cycles of a weaker yen. The outflow, totalling 105 trillion yen from January 2000 to June 2023, is observed during specific periods such as 2005-2007, 2013-2015, and from 2020 to the present. The introduction of the NISA program in January, exempting taxes on small investments, could exacerbate this outflow, posing a second 2024 problem for the yen.

In the face of these challenges, Japan must navigate the intricate landscape of global economic dynamics. The yen exchange rate remains a crucial factor, impacting the nation’s standing as the largest creditor and foreign investors’ confidence in Japanese companies. As the country addresses these dilemmas, the yen’s resilience in the global market will be a key indicator of Japan’s economic prowess. The yen exchange rate holds the key to Japan’s economic fate in 2024, and strategic measures must be taken to ensure its stability and strength on the international stage.

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