The yen’s astounding fall is most generally attributed to the gap between American and Japanese monetary policies. Although the Bank of Japan has raised interest rates slightly, it has not kept pace with the Federal Reserve, implying that investors have favored dollars in recent years. However, since October, the difference between America’s and Japan’s five-year government bond yields has reduced by more than one percentage point. Surprisingly, the yen has dropped another 4% against the dollar within the same time period.
Why is the yen still weakening? Successful corporate governance improvements may be partly to blame. As a result of measures initiated by Abe Shinzo, whose second term as prime minister lasted from 2012 to 2020, Japanese companies have grown more focused on returns on investment and have sold unnecessary stakes in other companies. Indeed, the country’s stocks have outpaced those of the majority of the non-American rich world during the last decade.
However, the emphasis on returns is also driving money overseas. In the fiscal year ending May 31, Japanese corporations invested $178 billion more abroad than foreign firms did in Japan, up from $72 billion in 2010. Although portfolio investment flows in and out of Japan (money entering and exiting stocks, bonds, and other instruments) are variable, direct investment is obviously moving out of the country.
TSMC’s recent plan to develop factories in Kumamoto province, south of Japan, drew international notice, yet the Taiwanese semiconductor giant remains an outlier. Many foreign corporations considering relocating to Japan are put off by the country’s cultural differences and language obstacles. The overall stock of foreign direct investment in the country is only 5% of GDP, placing it near the bottom of the global rankings, alongside Kiribati and Burundi, and much below the global average of 44%. As a result, the yen isn’t in high demand.
 Source: Economist
