(Bloomberg) — Brisk capital outflows from a slow-growing Japanese economy are deepening depreciation pressure on the yen.
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Many yen watchers see the still-wide interest-rate gap between the nation and the US as explaining the currency’s persistent weakness, especially given likely inflationary policies from President-elect Donald Trump. Less visible, yet just as influential, are trade and investment flows in and out of Japan.
Japan reported a ¥8.97 trillion ($57.5 billion) current-account surplus in the third quarter, but this was outweighed by direct and portfolio investment outflows. The nation’s currency rallied to a 14-month high against the dollar in September as traders unwound yen-funded carry trades, but has since weakened about 10%.
“Direct and portfolio investments are offsetting the current-account surplus” limiting potential gains for the yen, said Shusuke Yamada, head of Japan currency and rates strategy at Bank of America Corp. in Tokyo. Given that a large portion of the surplus is from primary income, and is reinvested abroad, “it’s easy to be led astray if you only look at the current-account balance.”
The current account measures exports and imports, as well as other cross-border flows including salaries and investment returns. Japan posted a record surplus of ¥12.2 trillion in primary income in the third quarter, mostly in investment returns. This offset a deficit in goods and services and boosted the current-account surplus.
“Deficits in the trade balance are leading to yen-selling to cover demand for foreign currencies,” said Hideki Shibata, senior fixed-income and foreign-exchange strategist at Tokai Tokyo Intelligence Laboratory Co. “This trend will continue.”
As well as portfolio flows, the data also reflect direct investment – money that companies bring in for business purposes in Japan, which is among the lowest of major economies.
“The barriers to entry for overseas companies are high,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “The business environment is complicated for overseas companies starting up in Japan, and because Japan’s growth rate is low, the market won’t expand.”
Direct investment flows out of Japan have exceeded those coming into the country almost every quarter since 1996. Outstanding foreign direct investment in the country stood at 8.3% of gross domestic product as of end-June, the lowest among the world’s 20 biggest economies, according to Bloomberg analysis of International Monetary Fund data. That compared with 99% in the UK and 57% for the US.