Musha Research Commentary

14 May 2024

S\Strategy
Bulletin (No. 353)

The disadvantages of a weak yen, essentially none
～ The unacceptable bad yen argument～
The Stirring Bad Yen Weakness Theory
While confidence in the economic recovery, rising stock prices, and Japan's resurgencestory is growing thanks to the weak yen, the usual suspects are once again stirring up
bad arguments against the weak yen. The Nikkei newspaper has been running a seriesof special features on the weak yen and has been championing the argument that there
is a limit to the weak yen., while on TV, for example, TBS has been running a selfdeprecating campaign on the weak yen as a symbol of Japan's decline, etc. The
argument that the yen will weaken as capital flees Japan's weak growth potential, such
as NISA investments being shifted overseas, is being interpreted as a sign that the yen
will weaken.
However, Japan's low growth potential is not a new story; since 2010, when the yen
appreciated, massive amounts of capital have flowed out of Japan to other countries withhigher growth rates, yet the yen remained strong. The argument that the yen isweakening because Japan is failing does not hold water. All citizens, not just investors,
must be made aware of the obvious fact that the major reversal of the yen's appreciation,
which destroyed and weakened Japan's industrial base, is the baseline for all matters.

Interest Rate Differences, Trade Balance Cannot Explain Yen Weakness
Along with the sharp rise in U.S. equities at the beginning of the year, the U.S. financial
markets have become increasingly speculative. The price of gold surged 14% since thebeginning of the year, reaching an all-time high. The gold price surge has been cited asfollows: U.S. price indexes have exceeded market expectations, renewed fears ofinflation, central banks in emerging countries such as China, Russia, and Turkey arebuying gold, and investors are hedging their bets against a possible stock market bubble
burst. Some believe that “Chinese investors, lacking effective options, are buying gold”
due to the slump in stock prices and deterioration in the real estate market.

Figure 1: US-Japan Interest rate differential and JPY/USD rate
8(%)

170
(JPY/USD)

Nominal Longterm
Real Longtem

6150

Real Short term

4Nominal Short term

130￥/$ rate

20110-2

90-4
70-6-8
2010/01

2012/01

2014/01

2016/012018/01

2020/01

Source:Bloomberg Musha Research

1/5

2022/0150
2024/01

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Strategy Bulletin vol353

Figure 2: Japanese Current Account balance and it’s Component(JPY bil.)

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0-500
-1,000Trade & services balance-1,500Primary income balance-2,000-2,500

Secondary income balance-3,000Current account balance-3,500
2000

2002

2004

20062008

2010

2012

2014

2016

2018

2020

2022

2024

Source: Minsitry of Finance, Bloomberg, Musha Research

Geopolitics and U.S. national interests are what drive the yen's depreciation
Why is the yen persistently weak? The yen's hedging costs against the U.S. dollar have skyrocketed since early
spring 2022, and Japanese investors dollar hedged return have been negative 1to 2% for two years. It is because
only the dollar hedging cost of the yen has been significantly exceeding the interest rate differentials, despite thedollar hedging cost of euro become below interest rate differential.
Since the hedging cost is considered as the market's perception of future prices, the market suddenly has formed
an anticipation of the yen's future depreciation. Where did this perception of yen depreciation come from? It can
only be attributed to geopolitics and the will of the U.S. authorities. In June and November of last year, Japan,
which has the fifth largest trade surplus with the US, was removed from the US Treasury Department's foreignexchange watch list (China, Germany, Malaysia, Singapore, Taiwan, and Vietnam). One cannot help but think thatthe super depreciation of the yen is the backbone of the U.S. national strategy of the hegemonic U.S., which has
no choice but to relocate its industrial clusters of high-tech manufacturing industries concentrated in thegeopolitical danger zones of China, Taiwan, and South Korea to the safety of Japan.

Figure 3: JPY and Euro’s Dollar Hedge Cost minus Interest Rate differential-3

Dollar Hedge CostーRate Differencial(JPY)

-2.5
-2

H cost > Rate D-1.5-1-0.5
00.5
1H cost < Rate D1.5

2024

2024

2023

2023

2023

2022

2022

2022

2021

2021

2021

2020

2020

2019

2019

2019

2018

2018

2018

2017

2017

2017

2020

Dollar Hedge costーRate Differencial (EURO)2Source、Bloomberg,Musha Research

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Strategy Bulletin vol353

Exchange Rates are Causes, Not Results
Market participants and economists should reverse the cause-and-effect relationship regarding exchange rates.
While exchange rates may move in the short term as a projection of economic reality, in the longer term they aredriven by policy intentions. In other words, we must know that the exchange rate is not the result but the cause.
In the past, a strong yen was the most potent tool to attack Japan. At the time, many economists argued thatJapan should accept the reality of a strong yen because deflation had strengthened the purchasing power of theyen. However, the appreciation of the yen has eroded Japan's competitiveness, encouraging the outflow ofcompanies, business opportunities, jobs, and capital overseas, and has hurt Japan's domestic demand, which inturn has caused further deflation. The vicious cycle of a strong yen and deflation was broken by Abenomics andKuroda's extraordinal monetary easing, which attempted to achieve reflation by inducing a weak yen as a starting
point.

Japan's Great Revival Can Be Seen Beyond a Weakening Yen
Exchange rates are the most important determinant of the future economy. The U.S., eager for Japan's industrial
revival, is inducing the yen to weaken. While South Korea dramatically increased its competitiveness and knocked
out Japanese high-tech firms during the remarkable depreciation of the won from 2008 to 2013, the entrenchmentof a weaker yen will prepare Japan for a dramatic re-emergence. On this trajectory, we see Japan re-emerging
as a manufacturing powerhouse and a services (tourism) powerhouse. The weak yen is concentrating global
demand in Japan, causing a boom in capital investment at record levels. In addition, high profits and the wage
gap between Japan and other countries are motivating companies to raise wages and end deflation. This will
revive Japan's strong yen over the long term. Japan should take advantage of the fortuitous depreciation of theyen and should not waste its time in trying to induce the yen to appreciate.

As Japan is the world's largest creditor nation, yen selling has no chance to win
The market may be repeatedly speculating to find a place to settle down. First, geopolitical reasons led to theformation of the market view that the yen would weaken for a prolonged period. We believe that the market isrepeatedly speculating to find the bottom of the yen.

Is yen depreciation speculation in its final stages?
The BOJ and the government need not panic over yen selling speculation. Unlike Turkey and other countries withweak currencies, Japan is the world's largest net foreign investor with $3.1 trillion and the world's largest holderof assets against the US with $1.2 trillion in US government bonds. The foreign exchange gains from this hugeamount of foreign assets are enormous, and the total amount of foreign exchange gains from the public andprivate sectors together is well over 100 trillion yen. Speculators are also aware of the depth of Japan's
pocketbook. Speculation about selling the yen may be in its final stages.

Figure4: Us Treasury Bond Holding by Countries Figure5: Net International Investment Position
1400($ bil.)

Luxembourg
1200

4.0

Japan

Belgium(Trl Dollars)

3.5

JPN

3.0
1000

China

2.5

Germany800
2.0

CHN600UKHK

1.5TWN

400

1.0

200

0.5
0.0005 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2400

Source: US Dept. of Treasury,Bloomberg, Musha Research

Source：IMF、Musha
Research

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02040608

101214161820

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14May 2024
The weak yen is preparing Japanese strong recovery. This fact is illustrated in the charts
below.
Strategy Bulletin vol353

Figure 6: Vigorous Recovery of Japan with 5 Indexes (1984=100)500
450

Personal Financial Asset
2023.3Q441.6

400
350

Nikkei Av.
2024.Q1
369.4

300

EmployeeComp.
2023.Q4
187.7

250
200
150
100
50

Corporate Taxable
IncomeFY2023 (e)265

Land Price Idx.
(6majer cities)
2023.73.5

080 81 82 83 85 86 87 88 90 91 92 93 95 96 97 98 00 01 02 03 05 06 07 08 10 11 12 13 15 16 17 18 20 21 22 23
Source:MpF,DoL,BoJ,Japan Reaestate Institute, Bloomberg,Musha Research
FY2023年Corporate Taxable Income forcast by Musha ResearchFigure 7: From punitive strong yen to beneficial weak yen

Spot rate
360

310

Beneficial weak yen
Spot rate < PPP

260

210

160

Purchsing Power Parity

Domestic-foreign
price differentials

110

Inverted
Domestic-foreign
price differentials

60
66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20 23 26 29 32
Source:OECD,Musha Research

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Strategy Bulletin vol353

Figure 8: Productivity and Employee compensation Trend under Strong Yen and Deflation
115

Physical Poductivity
110

Value-Added Productivity
Employee comp.

Fruits shifted to buyers
by price cut &strong yen

105

100

Employee sacrified to make up
loss of price cut&strong yen959085© Copyright 2023 Musha Research Co., Ltd. Although the information contained herein is based on sources that Musha Research believe reliable, Musha Research do not make any representation orwarranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of the information and opinion herein. Musha Research is not responsible for any losses
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